Inside IR35 and R&D

[WordIsBond]

In another crazy suggestion, have you thought abour ringing HMRC and asking them? Although I suspect they'll say yes if you just say you're a subbie, no if you just say you're insode IR35, and their head will explode if you say you're both.

I did think about doing that. I can't find anything in legislation that answers this, which I think just brings it down to someone's opinion, and which opinion is likely to carry the day if challenged.

[WordIsBond]

My view is that IR35 is irrelevant to RDEC as all IR35 basically does is determine how you have to remunerate yourself based on the income from a specific project. RDEC is all about looking at the actual work that is being done and whether it meets certain criteria for a claim. If it does you look at the costs associated with the work and claim some additional tax relief, either by offsetting a greater expense against your profits for corporation tax or claiming a cash rebate if you don't have any corporation tax.

That's not where I started on this when it was first suggested to me, but I think this is the place I'm ending up. I'm already claiming SME R&D on a big project we're doing and have done a few RDEC things before (outside IR35). So I'm pretty familiar with the process.

[ContrataxLtd]

That's not where I started on this when it was first suggested to me, but I think this is the place I'm ending up. I'm already claiming SME R&D on a big project we're doing and have done a few RDEC things before (outside IR35). So I'm pretty familiar with the process.

If you have done RDEC claims before then I would just go down the same line with this project too as you have for others.

Martin
Contratax Ltd

[jamesbrown]

BTW, OP, any recommendations on good sources of advice for RDEC or are you going this alone?

I do a lot of R&D but have never bothered with the SME scheme because I mostly team with other companies on bids and subcontract on larger projects and, for RDEC, I thought you couldn't claim more than the PAYE/NIC of the R&D staff doing the work, which is a pretty high bar for a director drawing a small salary. But now I'm wondering if my assumptions are correct...

[WordIsBond]

BTW, OP, any recommendations on good sources of advice for RDEC or are you going this alone?

I do a lot of R&D but have never bothered with the SME scheme because I mostly team with other companies on bids and subcontract on larger projects and, for RDEC, I thought you couldn't claim more than the PAYE/NIC of the R&D staff doing the work, which is a pretty high bar for a director drawing a small salary. But now I'm wondering if my assumptions are correct...

As I mentioned, we have a fairly large project running that qualifies for the SME scheme. It's an employee doing most of it so the claim is substantial. But anyway, we went with Advanced Assurance, and my contact with HMRC encouraged me to claim for RDEC on some of the other stuff I do for clients. Obviously everything goes through my accountant but the Advanced Assurance contact is my best source of information.

They have a nice little leaflet on R&D as well. Has a lot of useful information.

It's not really that hard to claim and the RDEC stuff took out about £3K of my CT liability last year, so it's worth it (our SME claim was considerably more). Obviously, if it were just PAYE/NIC it wouldn't go very far, unless you are spending most of your time on R&D, but you probably aren't, and it is pro rata for the year. One thing to consider -- depending on how much time you spend on R&D, it might be worth paying higher salary, at least up to the personal allowance. You pay EENI and ERNI on an extra £4K, save most of that back on CT, and then save even more on the CT because of the R&D credit. I don't know the exact figures but I'd guess if you spend more than a quarter of your time on R&D it would be worth it.

The big thing you are missing is pensions. If you are making significant pension contributions those also qualify for the credit. If you use any expensive software in the R&D, that also applies. Those details are in the leaflet I linked to. In my case, pension contributions exceed salary, and it makes a nice boost to the credit.

Finally, depending on circumstances, some travel expenses may be eligible. In our case, there has been some that applies. There's several examples here: CIRD83200 - Corporate Intangibles Research and Development Manual - HMRC internal manual - GOV.UK. Bizarrely, for the travel costs to apply, the staff member must pay them personally and be reimbursed. I don't know why that is and I don't have documentation I can point you to that states it, but both the HMRC Advanced Assurance liaison and my accountant said the same thing, so I guess it must be so. I always have MyCo pay travel expenses but we make an exception if the trip is required for an RDEC job, which has happened a couple times. In those cases, I've paid personally and reclaimed it from MyCo.

That's about all I have to give you. The Advanced Assurance people seem very nice, very helpful, very clear. Best department of HMRC I've ever encountered, by far. Maybe I really should ask them about this. If you've never claimed R&D before, and you have a job of any size that you think would partly or mostly qualify, I'd recommend the AA route. It's not adversarial at all, they want to help you claim it if you are eligible.

[jamesbrown]

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Fantastic, thanks.

When I do R&D, it's often pure R&D for a specific project among several parallel projects, where the others may be much more applied (D only). For example, I have one ongoing project that spans two accounting years (fixed price, but roughly 10-20% of my time), which is pure R&D - start to finish - but that type of work is very changeable from one year to the next - OTOH, that is surely the nature of R&D anyway.

Great tip on the AA stuff. Will definitely check that out - thanks again

[WordIsBond]

For example, I have one ongoing project that spans two accounting years (fixed price, but roughly 10-20% of my time), which is pure R&D - start to finish

Let's say you use a salary of £8K and pension contribution of £15K, no relevant travel or software. That's 23K applicable expenses, 20% of that is £4.6K. 12% is £550. Hardly a game-changer for your business, but if you have other RDEC stuff in addition to this one it starts to add up.

Once I realised how this thing works and began to think about it, I recognised that a very large percentage of my time is RDEC. That's why they bring me in, often, is to figure out stuff that no one in house can. Code implementation, more often than not, is done by my employees, their employees, or a subcontractor. If it weren't R&D they'd usually get someone cheaper than me to do it. Last year, 38% of my time was R&D, and I made larger pension contributions.

If you go this way and you have a year that has a higher than normal R&D percentage, you might want to shift as many pension contributions into that year as practical, to increase your staff costs in that year and thus your credit.

[jamesbrown]

Thanks again. Will need to look into the definition of R&D, but I recall that it involves resolving an “uncertainty”. I may be making conservative assumptions there too (was mainly thinking of stuff that would be publishable, whether or not it could be published, but the bar is probably lower than that).

[northernladuk]

Thanks again. Will need to look into the definition of R&D, but I recall that it involves resolving an “uncertainty”. I may be making conservative assumptions there too (was mainly thinking of stuff that would be publishable, whether or not it could be published, but the bar is probably lower than that).

I've never really got my head around this, particularly using that definition alone. I've had plenty of discussions with people who's definition of uncertainty would mean that anything but a straight SaaS service would count. Most recently was someone arguing customisation to Manhattan WMS was resolving uncertainty as they thought the business ask was not straight forward and they didn't know if it could do it so they spin up a PoC to prove it and they've resolved uncertainty. That's way off the criteria in my mind. That's just using code to produce an outcome, not resolve uncertainty.

Articles like this, I believe, blow their argument straight out of the water but some people just won't have it.

R&D Tax Credits | What software projects qualify?

Give that to, say, the Manhattan example and they can still pick a few bullet points to make their case.

IMO it's a very grey area but then I'm not a coder so I probably have a very different view on it.

[jamesbrown]

I've never really got my head around this, particularly using that definition alone. I've had plenty of discussions with people who's definition of uncertainty would mean that anything but a straight SaaS service would count. Most recently was someone arguing customisation to Manhattan WMS was resolving uncertainty as they thought the business ask was not straight forward and they didn't know if it could do it so they spin up a PoC to prove it and they've resolved uncertainty. That's way off the criteria in my mind. That's just using code to produce an outcome, not resolve uncertainty.

Articles like this, I believe, blow their argument straight out of the water but some people just won't have it.

R&D Tax Credits | What software projects qualify?

Give that to, say, the Manhattan example and they can still pick a few bullet points to make their case.

IMO it's a very grey area but then I'm not a coder so I probably have a very different view on it.

Right, it's definitely a grey area.

Aside from taking advice, I think the best you can do is to document the hours worked against specific things that qualify, in theory (which is itself a cost that needs to be stacked against the relief claimed). Without documentation, you may have a hard time justifying a claim on request.