Research and Development tax relief claims: a re-alignment in the law

6 December 2016

Incentives are offered by way of the Research and Development (R&D) Tax Credit regime. The R&D scheme permits claimant companies that are SMEs to claim R&D expenditure, plus an additional 130% of that expenditure, by way of additional business expenditure for tax relief purposes.

SMEs can choose to ‘cash in’ the relief at a conversion rate of 14.5%, and in this connection, the SME will surrender tax losses back to HMRC in exchange for the cash.

Qualifying expenditure for R&D purposes falls under various headings, including ‘qualifying expenditure incurred on contracted out R&D’.

The First Tier Tribunal held in a recent case (Gas Recovery and Recycle Limited v HMRC) that for the claim to be successful it would not be sufficient for the expenditure to be merely incurred; that is for an obligation to arise to make a payment to a contractor for carrying out the work. In meeting the various conditions that must be satisfied for the expenditure to be qualifying, the R&D claim may only be made where a payment is made by the company to the contractor. This is contrary to HMRC’s stated view in their manuals. Companies will therefore need to consider when they can make a valid claim. It remains to be seen whether HMRC will amend their current stated policy on this matter.

Other categories of R&D expenditure on which claims may be made could also be affected by this ruling.  For example, the expenditure on the provision of ‘externally provided workers’ also appears at first glance to rely on the claimant company making a payment to the provider of the external workers; and expenditure on staffing costs also ranks for R&D relief where amounts are paid to employees and directors carrying out R&D. Again, claimant companies will need to consider whether they are making a valid R&D claim where they are relying on the accruals basis of accounting, rather than payments actually made in the year in which the claim is submitted.

If you need advice regarding making your R&D claim, please contact myself or your local UHY tax expert.

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