One of the benefits from the Research and Development (R&D) tax relief is that it provides support not only for profitable companies but also those companies who may also be struggling to make ends meet.
We’ve recently helped a client who was in this very position, they were in need of an injection of cash in order to stabilise the company and enable it to move forward on a stronger footing.
In one of many conversations with them, it was established that they were undertaking some work around creating a brand new piece of software. The purpose of the software would improve the recycling and clean-up of materials when a building came to the end of its useful life.
Further discussions around the project highlighted that the work being undertaken would qualify for the R&D tax relief.
Briefly, where a company undertakes a project which is an advancement in science or technology an enhanced amount based on its qualifying expenditure can be deducted from its taxable profits without it physically spending any more cash.
In terms of our client, we were able to identify the costs relating to the project such as a proportion of staff and director costs, overheads, subcontractor fees and various support costs. This gave us a basis to work out the potential tax savings available to them.
Working with our client we proceeded to prepare a report supporting the R&D tax claim. Due to the generous nature of the tax relief, there are a number of conditions which are required to be met. Through preparing the report we were able to highlight these in a clear and concise manner. In our experience, the clearer it is for HMRC to see the qualifying conditions satisfied minimises any additional enquiries they may wish to make.
However, during the preparation of the claim, it became clear that the R&D tax claim and the enhanced deduction it provided meant that the company would end up being in a loss position. Normally in such tax planning, a loss means there is little which can be done expect to carry it forward against future profits.
Although this is the case for the R&D tax relief there is also the powerful opportunity to surrender the loss for an immediate cash repayment. Although the tax claimed back isn’t as generous as a future set off, where, as in the case of our client a cash injection was needed, it is invaluable.
The final step in the R&D tax relief claim was to submit it to HMRC along with the supporting report via the company’s corporation tax return.
While making the claim for the current year of accounts we were working on, we also identified the potential for making a claim for the prior year as well. The time limit for making an R&D claim is two years following the end of the accounting period it relates to. By amending the previous year corporation tax return, this gave us the opportunity to make additional tax savings.
By the time we had finished helping our client, we were able to achieve a £65,000 tax savings of which £46,000 was in a direct cash injection and the balance by not needing to pay corporation tax.
The team at Cottons are able to help your business with any Research and Tax matters. Contact us in our Northampton, Daventry, Rugby or London branches by clicking on our contact form or using the contact information on this page.
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