Your Ask Me Anything Questions Answered (November 2020)
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Thanks to everyone who joined us at our Ask Me Anything webinar on Tuesday 10th November. This is a brand new 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 a common area of confusion, how to deal with subcontractors on R&D projects, 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!
Question 1: If you spend £100k with a subcontractor, you would take £65k as eligible? Seems odd, is that designed to avoid contributing to the subcontractor’s general overheads and margin?
Yes, assuming that subcontractor was 100% focused on work that’s trying to make an advance in technology, you could claim £100k x 65% = £65k as eligible expenditure. That 65% apportionment is mandatory and is just one of the rules of the scheme. It’s effectively assuming that the cost of using subcontractors will be greater using employees, and attempting to balance that by removing some of the mark-up.
Question 2: Subcontractor costs can be claimed at 65%. But what if the subcontractor was connected i.e. a subsidiary in another country. Is that different at all?
Yes, there are different rules for connected subcontractors (broadly those that are controlled by the same person or group of people). If you used a connected subcontractor, it doesn’t matter where they are located in the world, but you can claim only the lower of:
a) The payment made to that connected subcontractor; or
b) The ‘relevant expenditure’ of that connected subcontractor, namely staffing costs, externally provided workers (i.e. agency workers), utilities and materials that have been transformed or consumed in the process of the R&D. It does NOT include expenditure on other subcontractors!
Question 3: Can you claim R&D credit at different stages of the project? Or on part of the work done?
A claim for R&D tax relief is made through the company’s tax return, so if the project spanned multiple years, you would expect to submit a claim for each year in which the R&D project was active. However, you can’t make multiple claims for relief within a claim period – for example, if Stages 1, 2 and 3 of the project were all active in the year, you would only be able to make one claim at the end of the year.
Question 4: We are coming across a lot of software development work in getting ‘off the shelf’ systems to talk to each other and reprograming them to interact. The work has been done in house by industry experts that have been employed by the company. Could this be R&D?
Potentially; it depends on the nature and significance of the technical challenges arising in that integration work. If the systems have been designed to work together, it would be difficult to argue that work qualified. However, if you can point to novel technical challenges and explain credibly why those were difficult to resolve, yes, there could be eligibility there.
Question 5: Is there a way of getting work done prior to the formation of the company? It was 100% R&D and done by a connected subcontractor.
No, you can only claim for expenditure incurred after a company has been incorporated. However, the company does not need to be trading for the expenditure to be claimable. For example, say the company incurred £50k of expenditure on R&D in a period in which it was not yet trading. The company has a choice to:
a) Apply for a cash credit for the pre-trading period; or
b) Treat the expenditure as if it were incurred on the first day of trading (which is the default position).
On the second part of this question, if a company has used a connected subcontractor the answer to Question 2 above applies.
Question 6: What do you think is the best way to get authorised with HMRC for R&D only (i.e. without taking the agency away from the client’s accountant)? What’s the best way to submit that authorisation to HMRC?
We’d suggest that the simplest option is for you to ask your client to sign a mandate letter. This authorises HMRC to speak to you about their R&D claim, but makes clear that you are not dealing with other aspects of their affairs. This mandate letter would typically be provided alongside the CT600 and technical report supporting their claim.
Join us next time
If you are a WhisperClaims customers and would like to join us at our next Ask Me Anything webinar, please subscribe to our mailing list and we’ll keep you posted on future dates.