The UK tax system provides companies with hugely beneficial tax reliefs for conducting R&D (R&D tax credit regime) and/or holding patents or licenses over patents (patent box regime). These tax reliefs can be worth thousands or millions of pounds including cash payments from HMRC. They can also uplift the value of a company in a company sale scenario and therefore it is worth all entities exploring whether these reliefs apply and claiming (or if already claiming, making sure claims are maximised).
There have also been a lot of changes to the rules recently along with added HMRC scrutiny (enquiries into claims have dramatically increased) and therefore having good advisors such as Critchleys can protect companies and make sure claims are robust.
The benefits
The definition of R&D can be quite wide and can apply to many sectors. Under the new R&D regime from April 2024, the benefit of a R&D claim can be 14-26% of qualifying spend. For Patent Box (tax savings for holding or licensing patents), the benefit can be a tax saving of up to 15% (given corporation tax increases to 25% in recent years). These are vast tax savings that can really benefit a company’s cash flow and financials. We are also seeing added benefit when coming to sell a company. If the profits of a company can be taxed at roughly 10% (under Patent Box) compared to the current rate of corporation tax at 25%, acquirers are willing to pay more to selling owners to acquire a company that benefits from low tax rates. This can be worth millions in a sale transaction. Being able to show a robust claim for Patent Box in the years before sale helps show acquirers the cash flow value they will receive post-acquisition increasing the sales price.
Recent R&D case (Get Onbord Ltd v HMRC)
Anyone involved in R&D tax credit claims over the past 6-12 months will know HMRC have increased claim reviews substantially. Colleagues of mine in the industry have reported HMRC are sometimes rejecting R&D claims without reviewing the claims properly and where it is clear the HMRC officer does not have the capability to understand the R&D work undertaken (not the fault of a HMRC officer but challenging for company’s making legitimate claims). The Chartered Institute of Taxation have approached HMRC for comment on this and have received recognition from HMRC that improvements need to be made. In our experience, it is more important than ever to have a robust claim and if the claim is reviewed by HMRC, challenge HMRCs findings providing good evidence to assist HMRC to understand the claim. Persistence appears to be key at times with this and having a good advisor like Critchleys to support you with claims has never been more important.
HMRC recently took a software development company (Get Onbord) to court to contest their R&D claim. The company was conducting software development to develop a novel, automated artificial intelligence process for know-your-client (KYC) verification and risk profiling. HMRC disagreed they were undertaking R&D and as a result the case went to court. HMRC lost the case and there were some important points raised by the judge detailed below:
- The utilisation of existing technology does not preclude an activity from constituting R&D. Innovation often involves integrating existing technologies to achieve advancements in a particular field.
- The lack of comparable capability elsewhere in the market can form sufficient demonstration that the innovation is not readily deducible by other competent professionals (note, this should not be solely relied on as evidence of R&D).
- A competent professional does not need to have a formal qualification in the relevant R&D field. A good technical understanding of the principals involved, the ability to describe the state-of-the-art and industry experience can be good evidence of being a competent professional (the tribunal used Sam Altman, the CEO of OpenAI, as an example of this given he does not have any formal qualifications).
- Shifting the evidential burden is a situation where the claimant has done enough to show that there was in fact, a technological advance. The burden must now pass to HMRC to produce some material to show otherwise, which may have not been the case in some enquiries HMRC have launched.
These are all important points, and this case highlights that HMRCs recent view on some matters in relation to certain R&D claims may be too narrow. It also shows HMRC should engage in discussion in relation to scientific or technological points on R&D as opposed to purely refusing R&D claims. There is merit in persevering when going through a HMRC R&D enquiry and concentrating on pressing your company’s detailed legitimacy to an R&D claim. As always, seeking good advice and assistance throughout the case is invaluable.
R&D tax credits – important changes
The R&D tax credit rules have seen large changes in recent years, and it is worth revisiting these below, the April 2024 changes could have large implications for some entities R&D claims and it will be important for company’s and advisors to work together to provide cash flow planning using the new rules for businesses that are conducting R&D.
From April 2024, there will be a merged research and development expenditure credit (RDEC)-like scheme with all companies, regardless of size, receiving an above the line credit at the current RDEC rate of 20%. The calculations can be complex, therefore included below is a summary of the new savings rates for companies that claim R&D tax credits.
* For loss-making R&D intensive SMEs, following consultation, the R&D intensity threshold (proportion of qualifying R&D expenditure compared to total expenditure) to qualify as an R&D-intensive SME has been reduced from 40 to 30 percent for accounting periods beginning on or after 1 April 2024.
There is a new category which is called R&D intensive. Broadly this means that at least 30% of a company’s expenditure is spent on R&D activities. The additional tax credit from being an R&D intensive company can be large and therefore good planning will be required for companies that may be close to this limit.
From April 2024, expenditure on overseas R&D will not qualify relief. There is a specific rule that provides an exception to this, in very specific cases where the conditions necessary for the R&D are not present in the UK and would be unfeasible to replicate in the UK. Volcanic studies, marine biology and perhaps certain vaccine research may be relevant to this exception but information from HMRC indicates use of this restriction will be monitored closely.
There is also a lot more additional administration required when submitting R&D claims and missing a submission can cause HMRC to completely reject an R&D claim. Below are the main deadlines but expert advice would be recommended to make sure all submissions are made accurately.
- From 1 April 2023, a company that has not claimed R&D tax credits in the past 3 years must notify HMRC of their intention to file an R&D tax credit claim within 6 months from the end of the period in which the claim relates. If this ‘advanced notification form’ is not completed, it will render any R&D claim invalid.
- From 1 August 2023, HMRC has announced that all claims will be required to be made digitally, except for companies exempt from the requirement to deliver a Company Tax Return online. HMRC will require additional information to be submitted through a new online portal (separate from the main company tax return). If the additional information is not submitted or is not submitted in the correct format, it deems the R&D claim invalid.
- The additional information form submitted via the portal will not replace the R&D claim on the company tax return; it is an additional compliance requirement and the R&D claim must still be made on the company tax return plus supplementary pages.
- Claims must contain a detailed report on the R&D project - including the name of the agent who has advised the company on compiling the claim. The claim must also include a breakdown of costs across categories.
Patent Box relief
If you own or exclusively license an IP right (broadly UK or EU patents or licenses) and have undertaken previous R&D activity in respect of that right, don't miss out on this valuable opportunity that could bring a 10% effective tax rate on relevant patent profits and potentially increasing the value of the company on an exit.
Under the new Patent Box regime, a company could be required to stream its Patent Box calculation on an IP right by right basis. Therefore, if you believe that the Patent Box regime may be beneficial to you, there are some easy steps to ensure you have the information you need should you decide to claim relief. This includes:
- tracking your patent related income and expenditure
- maintaining an up-to-date list of patents (both pending and granted)
- keeping track of any R&D spend related to your relevant IP
It is sobering how many new clients we engage that are entitled to claim patent box or could obtain a patent to obtain patent box.
Summary
R&D tax credits and Patent Box are some of the most valuable reliefs for companies and we still find cases where companies are not claiming when they can, are under claiming or in some cases are overclaiming which can have large impacts for future company exit transactions along with going through a HMRC review/enquiry. Making sure claims for these valuable tax reliefs are made and are robust has never been more important.
If you have any questions related to this article that you wish to discuss with us, please contact our Partner and Head of Business Tax, Ian Timms.