Your Ask Me Anything Questions Answered (February 2021)

Thanks to everyone who joined us at our Ask Me Anything webinar on Thursday 11th 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!

Q&A

Kick-off questions

“How do I include furloughed workers in an R&D tax relief claim?”

We’re increasingly being asked about furlough payments and R&D tax relief as our clients start to prepare claims the cover the lockdown periods. We’ve written about furlough and R&D claims before, but, in short, you have to exclude the time an employee spent on furlough from the claim, and then apportion the remaining time to R&D. For example, if a staff member was furloughed for 50% of the claim period, and then spent 50% of their time on R&D, you’d include 25% of their staff costs in the claim.

“My client used COVID-19 funding on their R&D work – how do I reflect this in their R&D tax relief claim?”

Again, this is something we’re being asked more and more as the affected claims start washing through. We have written about this before as well, but the key points on this is that all of the support – CBILS, BBLS and local authority grants – are grants and therefore affect how much of an R&D claim can be claimed through the SME scheme.

“The directors at the claimant company are paid as subcontractors – can I claim for these costs?”

This is a tricky area of the scheme, and there’s really no definitive answer. What we can say for definite is that Director’s cannot be EPWs for the purposes of R&D tax relief – that is specifically dealt with in the guidelines. Unfortunately, the guidelines say very little about Director’s as subcontractors, but taking the rules about subcontractors into account, it seems clear that a Director would have to have a contract with the company to carry out specific tasks related to the R&D to be able to meet the criteria for qualifying subcontractor costs. Where there is no contract, or a contract to provide the services of a Director to the claimant company, it would be difficult to argue that this meets the criteria for eligibility.

Your questions

“How do HMRC view claims for ongoing refinement and development costs?”

One of the key criteria for work to be considered eligible for R&D tax relief is that it is undertaken as part of a project with a tangible start and end. This means that ongoing refinements and optimisation that form part of a company’s day-to-day business, and that do not fall under and specific projects, would not be eligible for R&D tax relief.

“I am preparing an R&D claim for a company with the project that started in the previous year. Can I include the costs for the previous years on the same project in my claim?”

In short, no! You can only include the costs incurred or that hit the P&L during the claim period in each claim. However, it is absolutely fine to claim for the same project for several years, assuming that the work took place over several claim periods. You can also go back and claim for previous years for up to two years from the end of the claim period.

“I was approached by a company who has several projects potentially R&D eligible. Can I pool these projects together for the claim purposes or do I need to keep them separate?”

In your initial discussion with this company, we’d advise that you discuss and assess the projects separately, so that you can be sure that each individual project meets the criteria for R&D tax relief eligibility. However, once you’ve done that, the WhisperClaims app is designed in a top-down way, meaning that the costs and projects are entered holistically and not as separate projects.

“How does the fact that the company has a patent or registered design affect the eligibility to R&D claim?”

Having a patent or registered design does not directly affect a company’s eligibility to claim R&D tax relief, although having or applying for patents does suggest that the company is undertaking innovative work. One thing to note is that the costs related to applying for a patent cannot be included in an R&D tax relief claim.

“I have few companies pursuing innovation in education sector, is there a scope to claim R&D in there?”

The quick answer to this one is in general, no, you won’t find much eligibility in the education sector. Education and a lot of the research that goes around it would fall under the heading of social science, which is ineligible for R&D tax relief.

“What content do you recommend including in the additional detail of the WhisperClaims report to tailor the reports for each client?”

The additional detail section is designed so that you can describe your clients projects in more detail, so we recommend focussing on the technical aspects – make sure that you include information on the baseline, technical advances and uncertainties for each project, and avoid including too much commercial detail.

“The self-assessment deadline was extended slightly.  Have you heard any chatter about something similar for R&D two-year cut offs?”

No, we’ve heard nothing at all about potential extensions.

“How does HMRC check R&D claims and what triggers the check from HMRC and what are the time frame please? What happens if HMRC rejects claim after additional check and what are the implications for the accountant? Finally, other than reducing the R&D claim, what kind of penalties do they typically issue?”

This is a big set of questions that needs some explanation – we’ll cover this individually in a later blog!

“Could an inter-company loan every be seen as a subsidy of R&D?”

Looking through CIRD80000, no mention of loans is made at all in the context of subsidised expenditure. This has been taken to mean that, with the exception of the government-backed coronavirus loans, taking a loan to fund R&D will not affect a company’s ability to claim R&D tax relief as it is not considered a subsidy.

In this specific case, this should stand as long as the loan is paid back. Where it is not, it could be seen as a tax avoidance mechanism by HMRC, as described in CIRD91700.