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and the importance of understanding and using R&D Tax Credits.
If we claim R&D tax credits, can our clients claim too?
This is a common question we are asked after having made a client's first claim, particularly where the claim may have involved claiming for work done by other companies. There is not a simple answer to this, but in this article we will show you some of the factors that you should consider.
Let's start with an example
A company offered technology design services, where they would agree a detailed functional specification for a component, for example an electronic PCB. This would be agreed for a fixed fee, with the details of how the component was designed left up to the company. The agreed fee for the contract was £200k.
The company was able to claim R&D tax credits for some of their work on the project for the following reasons:
- The detail of designing a component to meet the client specification revealed a number of challenging uncertainties to be resolved.
- The company had a number of clients with similar requirements, so they devised a novel solution that would allow them to meet all their client's needs, whilst along the way gaining knowledge that would allow them to complete similar projects more easily in future.
- As part of their R&D review with WOCO, we identified qualifying costs of £100k that could be attributed to the R&D (for this and related projects), resulting in a tax saving of £24,700.
At this point, the question was asked whether the client could also make a claim related to the same project. To answer, we need to consider the following:
- Was the client a large company? If they (or their group) have more than 500 employees, then they may not make a claim because the RDEC scheme applicable to large companies doesn't allow the costs of subcontractors to be claimed, although of course it doesn't rule the client out from claiming some of their costs in an RDEC claim.
- Was the subcontracted work the entirety of the project? In our example, if the requirement had been to design a fully complete component that would be suitable for the client to then use or sell (for example a consumer device), then again it is unlikely that the client to make a claim as they have not really contributed to the R&D themselves.
- Was the subcontracted work part of a larger design? If the client is taking the technical lead and the £200k project was to produce a component to be integrated into a larger system or product (perhaps alongside work carried out by a number of other subcontractors as well), then a claim could be possible.
As well as including the client's own costs (for example staff involved in project management, architecture design or testing), the £200k spent with our company would be included, although only 65% of is allowable. That would generate a tax saving to the client of about £32k, and this would add to the normal tax reduction associated with spending (£38k in this case). Overall, of the £200k cost of the project, as much as £70k is returned as tax savings. Being aware of this when negotiating your contracts can be very helpful!
Note that there is one other scenario to be aware of here. If the client is doing the whole design, and our company is simply providing services and people on a time and materials basis, then our company would not be eligible to claim as they have simply been following someone else's instructions! All is not lost if you find yourself in this position - see our article here on making claims as a subcontractor for more information.
In this article we have used the example of an electronics design, but these issues cover a much wider range of potential projects and technical areas. The most common ones we see in our work are those of software and web platform designers, pharmaceutical research and novel materials and process development, but let us know if you think your area of work might also be open to these kinds of claims!
If you'd like us to have a chat with your clients about this, we always work on a "no claim no fee" basis, so any up-front advice of this nature will be completely free of charge. Give us a call on 07752 057553, or e-mail us at email@example.com