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The problem with deadlines is that it’s human nature to leave everything to the last minute. Yet with R&D tax relief, there are clear advantages to completing a claim early and getting well ahead of those cut-off dates.
Claims on R&D activity can only be submitted after the accounting period in which the work takes place, and they are filed alongside the company’s tax return.
Most businesses file their returns close to Corporation Tax (CT) deadline day, settle any outstanding CT liability and then start their R&D claim afterwards, which can generate a rebate or a different benefit type. It is even possible to submit a claim up to two years after the accounting period in which the company carried out the work (the CT600 amendment deadline).
Yet it may be in your clients’ interest to claim early and even bring the filing of accounts and returns forward to submit everything sooner. In fact, HMRC would also encourage claims to be made early where possible to avoid their expected pinch points in the year. Here are some of the benefits of doing so.
Better cashflow
Some R&D claims wipe out a company’s Corporation Tax (CT) liability entirely, with spare benefit leftover to be taken as cash or to offset future profits.
If they claim late, they have already paid out their CT bill, and then will have to wait for HMRC to process a refund — which will take longer at the moment, due to the increase in HMRC’s checks and enforcement activity.
Ideally, clients should be looking to get a claim in before the CT deadline, as it means they wouldn’t be paying HMRC and then waiting for a refund, giving them a cashflow benefit.
Easier financial forecasts
Filing early can also give a company a better sense of their overall tax position, something which is particularly important for cash-strapped businesses. Starting an R&D claim after a client files their tax returns means there is a delay before the company can properly analyse its Corporation Tax position.
By starting the process earlier, they will have a better idea of their actual CT position, allowing them to forecast and plan their expenditure for the coming months.
Gets money flowing in
If a client’s claim will generate a cash benefit, the sooner their claim goes in, the sooner they will receive that money. This seems obvious but we regularly hear from businesses waiting for their R&D cash to be paid out so they can begin other projects.
Better understanding of qualifying activity
Not all companies, especially first-time claimants, keep track of written records of every aspect of their R&D projects. This means that, when they come to make a claim, they need to suddenly recall activity from the start of the project — which can be two years ago.
Starting the process sooner means the activity is fresher in the mind, and data and files closer to hand. It’s also a useful opportunity to begin recording relevant information for subsequent claims too. We work with many clients to collect their R&D cost and technical information throughout the accounting period, giving us a better opportunity to optimise the claim.
April 2023 looms
A whole host of legislative changes come into effect from April 2023, including a requirement to notify HMRC in advance of making a claim within six months of an accounting period end (with the exception of companies who have claimed at least once in the prior three years).
Delaying conversations with clients regarding R&D tax relief claims increases the risk they will miss this deadline.
What should accountants do?
Accountants should discuss filing accounts and tax returns with clients early. This won’t change the company’s CT deadline date, but it will bring any payments due from HMRC forwards or help them understand their actual tax liability.
Crucially, accountants should encourage clients to keep records of their R&D activity and costs as they go.
R&D tax relief is one of the most generous incentives available to innovative SMEs, and while many benefit from it, plenty of these claimants are not making the best use of the scheme by filing later than they should.
Michael Crosson is a Specialist Tax Consultant at innovation funding specialist Catax. He can be contacted at Michael.Crosson@catax.com
