New R&D tax relief plan with ‘advance assurance' boosts SMEs
QUESTION: I own a small company and I think I may be carrying out product and process improvements that may qualify as research and development for tax relief purposes. How can I find out whether my product development meets the necessary conditions?
ANSWER: Entrepreneurs and small company business owners are faced with many uncertainties and issues they need to address in order to ensure their company is able to compete in today's dynamic markets. The UK government's research and development (R&D) Tax Credit Scheme offers assistance to many companies in the form of tax relief on qualified R&D expenditure.
As of this month, small companies with a turnover under £2 million and fewer than 50 employees will be able to seek “advance assurance” on R&D tax relief, providing greater certainty and enabling more effective financial planning.
SME R&D relief works by way of a super deduction, allowing companies to reduce profits liable to corporation tax by 230 per cent of their qualifying R&D expenditure.
The new measures published recently within the government's “Making R&D Easier' HMRC's plan for small business R&D tax relief” comes in response to a consultation on R&D which sought to improve a) accessibility of the relief for small companies, b) addressing areas in relation to claimants' awareness of the credits, c) design of the rules, and d) understanding of the rules and the claims process/administration.
HMRC says that the “advance assurance” process for small companies will give applicants “assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.”
One of the key benefits of the new scheme is to address the uncertainty companies face as to whether the R&D costs incurred throughout the year would qualify for the credit which was assessed as eligible at the time the tax return was filed (ie after the expenses were incurred).
From late November, small and medium enterprises that have not previously claimed R&D tax relief will be able to apply for “advance assurance” on whether their projects qualify for the credit, and, if successful, will last for up to three years. This will allow SMEs to focus on R&D projects without the uncertainty as to whether their R&D expenditure will qualify or not.
SMEs will be able to sit down with their accountants and HMRC specialist units to discuss their proposed projects. Once the company and HMRC come to an agreement over the eligibility of the projects, “advance assurance” will be granted.
Although HMRC has not yet released the formal application procedure and requirements for obtaining R&D tax credit “advance assurance”, SMEs should start getting prepared for this new process.
To start, SMEs should identify projects that will generate the highest returns and that create a competitive advantage for their business. Once projects have been identified they must then be assessed to determine if they qualify under HMRC's guidelines.
The key to qualifying projects for the R&D tax credit schemes is being articulate when describing the advancement in knowledge or capability, and when describing the scientific or technological uncertainty that would be resolved.
Additionally, if the knowledge already exists outside of the public domain or if there is public knowledge of failed attempts by others to resolve the uncertainty, it must be declared to HMRC. In either case, the project can still move forward because there is a scientific or technological uncertainty to be resolved.
“Advance assurance” for R&D Tax Credits offers SMEs an opportunity to expand their R&D operations without the risk of failing to qualify every year. With its introduction, companies can focus on R&D without worrying as to whether the expenditure incurred will be eligible for tax incentivisation.
:: Janette Burns (j.burns@pkffpm. com) is associate director at PKFFPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.