Reply to: R&D Relief?

[Lance]

I agree that the model aeroplane example is R&D. I've worked for companies who claim R&D tax credits for far more dubious projects.

I think the accounts idea of spinning up another company just to milk the tax credits is stupid.
Setting up another company to own and develop the product is probably a very good idea and separates it from your contracting income. Use seed capital from contractor CO to startup if needed.

If your accountant suggested the new company for the first reason then get a new accountant. If for the second then talk to him about how this will work and do a business plan (like a proper business).

[WordIsBond]

You'll soon realise the the purpose of some on CUK isn't to answer the question as given, but to answer a different question that provides a better chance of "winning" the argument.

Or maybe they don't actually know how to answer the question as given.

In this case, it's more that some were of the view that the question as given might be moot, which in my view is a legitimate point to raise, if frustrating to the person who knows it isn't moot.

Interestingly, I had a similar issue with the thread I linked to above.

[Paralytic]

Oh please, I might have been researching the efficacy of face masks and injecting mice with coronavirus for all that it matters to the original question. Are you saying that it is impossible to run a ltd company business with an element of privately funded research and development?

You'll soon realise the the purpose of some on CUK isn't to answer the question as given, but to answer a different question that provides a better chance of "winning" the argument.

[Sosoomii]

Thanks very much, that’s really useful and encouraging! I shall take some time to read the links.

[WordIsBond]

This amounts to several hundred hours of my time and maybe £10k in sub-contracting the building of prototypes. There is no guarantee that the prototype will work (as well) as intended, though obviously I hope it does and I can then start full production.

This sounds very much like R&D. A lot of discussion in this thread, first page or two might not be that useful to you but it gets better: https://www.contractoruk.com/forums/...-ir35-r-d.html

I would definitely advocate Advanced Assurance, it was an absolute winner for me, they are very, very helpful.

1. Can I somehow claim my time for R&D relief given that I can’t see how to keep timesheet records for this activity and anyway my income is mostly dividend with a small salary, so any nominal hourly rate would be v small. My accountant has suggested I could set up a second ltd co and bill that one from the first, but I don’t understand how that will work?

I was told by Advanced Assurance if I don't have precise time records to use a reasonable estimate for my time, but for conservativism to estimate a little low.

Basically, as an example, if you work 300 hours a year on the project and do other work for 1500 hours, 1/6 of eligible costs for you will be eligible for the credit.

Eligible costs for you will be salary (minimal), employer NI (minimal) and pension. As I said in the linked thread, it may be worth it, if you have a high percentage of R&D, to pay a higher salary that year, at least up to the Personal Allowance threshold.

You may also want to push more pension contributions into the year that has the tax credit. Suppose you make contributions of £15K a year -- 1/6 would be £2.5K, which isn't nothing but hardly game-changing. But suppose you defer the contribution from the prior year and bring forward the next year's contribution all into that year, making your contribution £45K (if you deferred the prior year's you can use its allowance and exceed £40K). Now, you've got tax credit on 1/6 of £45K, or £7.5K -- now it begins to add up a little.

and maybe £10k in sub-contracting the building of prototypes....

2. Does the subcontracted prototype build qualify for R&D relief of is that capital expenditure?

Probably not, but read the documentation carefully and see if you can categorise it as other than "sub-contracted". Can you hire the person doing it on a FTC? Then, it isn't sub-contracted. Is it just time you are paying or is there software / licenses to be purchased?

Do other contractors have experience of doing R&D outside of client based business?

Have done quite a bit both inside and outside client based business. Discussed on the thread to which I linked.

Good luck with it.

[WordIsBond]

You can't rely on accountant's advice though. Accountant's opinion is just as valid as an opinion of a bloke that needs 50p down your local. If R&D was written with the intention to give tax breaks to big donor companies, then by claiming it for your small company you'll be stepping on someone's toes.

This is pretty stupid even by your standards. I've made multiple R&D claims and HMRC never said, "No, no, it's only for bid donor companies."

They are LOOKING for better takeup of the credit. They (the Advanced Assurance department) told me so directly.

[BlasterBates]

You can't rely on accountant's advice though. Accountant's opinion is just as valid as an opinion of a bloke that needs 50p down your local. If R&D was written with the intention to give tax breaks to big donor companies, then by claiming it for your small company you'll be stepping on someone's toes.

This is pretty clearly R&D, it will lead to a patentable idea.

[Sosoomii]

Having done real R&D I would say this sounds very much like it, i.e. you're not just building a model aeroplane to a specification, you're applying a novel idea in aerodynamics to generally make model aeroplanes more efficient. This is not comparable with to building a piece of Software as suggested by the other posters.

I would go ahead as your accountant suggests. If he's satisfied then so will HMRC.

Thank you.

[elsergiovolador]

Having done real R&D I would say this sounds very much like it, i.e. you're not just building a model aeroplane to a specification, you're applying a novel idea in aerodynamics to generally make model aeroplanes more efficient. This is not comparable with to building a piece of Software as suggested by the other posters.

I would go ahead as your accountant suggests. If he's satisfied then so will HMRC.

You can't rely on accountant's advice though. Accountant's opinion is just as valid as an opinion of a bloke that needs 50p down your local. If R&D was written with the intention to give tax breaks to big donor companies, then by claiming it for your small company you'll be stepping on someone's toes.

[BlasterBates]

Definitely maybe R&D. I appreciate that it is possible to wrongly classify product development as R&D but I’m confident in this case that the work is genuinely R&D.

Consider this example, which is similar but not my actual case:

You are an experienced aerodynamics professional running your own business providing contracting services to NASA, Boeing etc over the years. You have an idea (unproven) that might be a step forward in low speed flight and lead to better model aeroplanes.

Okay, it’s not the most important piece of tech in the world, but after you review countless text books, journals etc you confirm that this is a novel idea which has not previously been explored and the details of which are not readily obvious to a professional. If it works you will have the basis for the best model planes/gliders around and would hope to sell enough to make your money back in 3 years or so. If it doesn’t, it will still fly but be nothing special in an already crowded market. There is genuine uncertainty whether the idea has merit or even how to analyse the idea accurately, so new analytical techniques have to be developed and validated (by testing a prototype).

An IT example might be that you have a brainwave for a new spreadsheet app with novel features that you think has a big advantage over Excel. You’d have to do some work to develop the idea and satisfy yourself that it was better. I think I’d call that R&D rather than product development?

But as it is self funded the hours that go into it don’t really have a monetary value, so it doesn’t seem possible to,take advantage of the R&D relief on offer?

Having done real R&D I would say this sounds very much like it, i.e. you're not just building a model aeroplane to a specification, you're applying a novel idea in aerodynamics to generally make model aeroplanes more efficient. This is not comparable with to building a piece of Software as suggested by the other posters.

I would go ahead as your accountant suggests. If he's satisfied then so will HMRC.

[Sosoomii]

Based on you rejecting the answers given freely so far, and your avoidance in answering questions, maybe just tell us the answer you want to hear.

Perhaps posting on Internet forums could count as research and be an expense, in your eyes?

Which questions have I avoided answering??

I’m beginning to see why you guys are IT contractors - you lack the drive and imagination to be true businessmen and the social skills to work in a team. Cheerio.

[WTFH]

So like Amazon, with the UK co paying the Liechtenstein co? Seems plenty of evidence that Amazon’s actions are not only perfectly legal but good business practise. But I don’t think any savings would cover the cost of a second set of accounts in my case, so looks a non-starter.

Because you repeatedly imply that I am trying to pull a fast one I want to repeat for the avoidance of any doubt that I am not interested in making a bogus claim. But I would like to make legitimate tax savings where the govt are encouraging them and where I qualify for it. If my work doesn’t qualify I’m sure my accountant and HMRC will tell me. But I know what R&D looks like, I have done plenty of it for clients and in previous life as a permie.

Based on you rejecting the answers given freely so far, and your avoidance in answering questions, maybe just tell us the answer you want to hear.

Perhaps posting on Internet forums could count as research and be an expense, in your eyes?

[Sosoomii]

So he's suggesting instead of claiming your time and salary spent on this which is the normal way you will set up another company and invoice the nuts off the first company to claim more back.... I can't see how that would work for one minute. It's the most thinly disguised sham possible surely?

If you are going to claim for R&D which I don't think you are really doing then at least try and game the system properly. If you do get caught claiming R&D where it's not really R&D and then using some convulted system to get a more favourable outcome for your pocket you are going to get your pants pulled down big time.

But that's my opinion....

So like Amazon, with the UK co paying the Liechtenstein co? Seems plenty of evidence that Amazon’s actions are not only perfectly legal but good business practise. But I don’t think any savings would cover the cost of a second set of accounts in my case, so looks a non-starter.

Because you repeatedly imply that I am trying to pull a fast one I want to repeat for the avoidance of any doubt that I am not interested in making a bogus claim. But I would like to make legitimate tax savings where the govt are encouraging them and where I qualify for it. If my work doesn’t qualify I’m sure my accountant and HMRC will tell me. But I know what R&D looks like, I have done plenty of it for clients and in previous life as a permie.

[northernladuk]

Thanks for the link. The difficulty seems to be that as contractor salaries are generally low a few hundred hours of research is still very little expense to be claiming on and so not really worth the hassle, and hard to prove. I shall speak to my accountant again next week and try to understand his second company idea a bit better.

So he's suggesting instead of claiming your time and salary spent on this which is the normal way you will set up another company and invoice the nuts off the first company to claim more back.... I can't see how that would work for one minute. It's the most thinly disguised sham possible surely?

If you are going to claim for R&D which I don't think you are really doing then at least try and game the system properly. If you do get caught claiming R&D where it's not really R&D and then using some convulted system to get a more favourable outcome for your pocket you are going to get your pants pulled down big time.

But that's my opinion....

[Sosoomii]

This link might help with the detail

http://www.hmrc.gov.uk/gds/cird/atta...impleguide.pdf

Your accountant is probably best bet on what can and can't be claimed if you do want to go through with this.

I've had a look back and we've a number of threads on R&D which all come down to an discussion about whether it really is R&D and next to nothing going further in to what can be done which I think speaks volumes.

That's the best I can do sorry.

Thanks for the link. The difficulty seems to be that as contractor salaries are generally low a few hundred hours of research is still very little expense to be claiming on and so not really worth the hassle, and hard to prove. I shall speak to my accountant again next week and try to understand his second company idea a bit better.