Thanks to everyone who joined us at our Ask Me Anything webinar on Tuesday 8th February. This is a webinar series designed exclusively for WhisperClaims customers with one simple objective—to help build your confidence in delivering an effective R&D service for your clients. This week we kicked off the session with a deep dive into some common areas of confusion, which led to some great questions being asked by our attendees. We’ve answered those below.
If you have any feedback on our advice or how the webinar went please get in touch – we’d love to hear from you!
Your questions answered:
Does the refurbishment of a capital item qualify for R&D tax deduction? If it does, can the expenditure be capitalised, or can it be expensed to the P&L?
The answer to this question is almost certainly no. To be able to qualify for R&D tax relief, it would need to be demonstrated that some form of technical advancement has been made on the item. However, If this can be demonstrated, then it is a modification as opposed to refurbishment and there may be potential to claim for the time spent overcoming the uncertainties involved. In terms of capitalising the costs, that’s a call for you to make along with your client, but remember that if the costs form part of a tangible asset then you won’t be able to include those in an R&D claim.
Can I submit a CT600 claim to HMRC and then send the narrative later? My client needs more time!
The short answer to this is yes, you submit a CT600 claim and then send the narrative later, if necessary. The longer answer is yes, but it’s not a great idea! Best practice is definitely to send the two documents together—first of all it makes sure that the narrative doesn’t get separated from the CT600, and second of all if the narrative is delayed for more than a short period then the chance of HMRC asking questions about the claim is much higher than if the narrative was submitted in the first place.
My client has had three grants this year. One of them is for R&D but the other two aren’t—do I have to include them all in a claim?
Again, this is a question of what is doable versus what is best practice. It’s entirely your choice about whether to include all of your clients grants in the R&D claim documentation, but omitting non-R&D grants means that the grants total in the claim won’t match that in the accounts. This could then lead to HMRC looking at the two figures and asking the obvious question of why there is a difference. We’d therefore advise always being upfront about all grants received, even where there are none that relate to R&D.
My client has had to buy licences and patent to be able to do their R&D – are these costs eligible?
In short, no. Legal costs such patent applications are specifically excluded, and the purchase of IP or licences wouldn’t fit into any of the allowable cost categories for an R&D tax relief claim.
Can directors’ pensions and bonuses be included in a claim?
Yes! These are legitimate staff costs, and as such can be included in an R&D tax relief claim, no matter the size of the pension contributions or bonuses.
Are software integrations eligible?
This is an ‘it depends’ situation! If the integration involves integrating two disparate software systems that have never been integrated before, and there is a requirement to make an advance in software science to achieve a successful integration, then yes, there’s a good chance that the work would be eligible. On the other hand, bringing together two systems that have established integrations, or that can be integrated without changing the underlying technology would not be eligible. This also applies where the company has used a third-party integration tool, such as Zapier, to integrate two software systems that haven’t been used together before. If the third-party tool can handle this without any uncertainties, then it wouldn’t be eligible.
Would designing a new shoe be eligible?
Almost certainly not – it’s unlikely that the design of a new shoe would involve much eligible work. Clothing and footwear manufacturing is generally pretty well established, and most R&D focuses on aesthetic effects and designs, which wouldn’t be eligible. The claimant would have to have to come up with something very new that required advances to be made in materials science or engineering to have a chance of claiming.
Can the purchase of a capital asset (in this case an industrial fridge used for storing samples), be expensed to the P&L and included in the R&D claim, if the R&D work could not be completed without the industrial fridge?
Generally speaking, no. Fundamentally, the cost of purchasing a capital asset such as a fridge wouldn’t fit into any of the allowable cost categories for an R&D tax relief claim – it wouldn’t for example, be classed as a raw material as it would remain unchanged at the end of the R&D project. If capital assets are required for R&D projects, it is often better to investigate whether they can be claimed through R&D capital allowances.
Where have you previously found eligibility within software companies? It seems nuanced up against faster, lighter, stronger etc.
This is a really huge question that we plan to cover in subsequent blogs and webinars! However, our top tip for software claims is to ignore the functionality of software and look instead at the underlying code and advances contained therein. For example, a company might develop a piece of software that is functionally identical to something else in the market, but that performs ten times faster and is far more computationally efficient. You could also see software that is entirely innovative and enables users to carry out functions that have never been available before, but that has been built without any advances made in software science.
Can a proportion of costs to upgrade manufacturing facilities be included, if it’s used for current R&D projects?
This is another ‘it depends’, but probably not! If the upgrade of the manufacturing facilities constitutes an eligible R&D project in itself, then the company might have a claim. If, however, the upgrade can be achieved without any requirement for R&D, and then the facilities are used for the R&D projects, then the costs would not be allowable for R&D tax relief. As above, with this type of project it’s usually more beneficial to look at whether R&D capital allowances might apply to the spending, assuming it is capital in nature.
Can you make corrections to a CT600 after the two year hard deadline if you discover an error or omission?
Almost certainly not – there’s no mechanism to submit an amended CT600 after the deadline, and no obligation on HMRC to accept it. All you can do is explain the situation directly to HMRC and hope that they take pity on you, but this is very unlikely.
How long do HMRC have to question a return?
The limits for questioning an R&D claim are the same for any other tax investigation. In general, HMRC will try to ask any questions within a year of submission (and, in our experience, it’s likely to be within three months). However, especially when the R&D investigation has been triggered by investigations into the company’s other tax affairs, this time limit extends to four, six or even twenty years depending on what HMRC suspects has happened.
If, for example, a client started R&D work in the year to Dec’19, but filed their CT600 and accounts for FY2019 in Sept’20 without R&D relief, can we go back and amend the CT600 to claim R&D relief for FY2019?
Absolutely! You have two years from the end of the financial period to submit an R&D tax relief claim, whether you do this in the initial CT600 submission or via an amendment. In this example, as long as you submitted the amended CT600 by the 31st December 2021, HMRC will accept it.
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