Mr Taxman… Send Me a Dream…

Forget Brexit my fine feathered finickity fiduciary. Life is to be lived, and work is to be done. Dress the halls with bells and holly, have a Hells lager and get a jolly brolly!

Ok… well… would it help if I told you that the UK has one of the best, and most generous set of schemes for creativity and research and development?

Well while it may seem to most that the tax man seems to tax the hell out of everyone, VAT, Income tax, corporate tax, inheritance tax on that tax.. especially if low and behold, you are successful… while letting these big companies and billionaires pay nothing… that is sadly not HMRC’s fault, but a question of world politics. What may surprise you to know is we have one of the most generous and flexible systems in the world for Research and Development tax relief.

1. The Australian thing was a crap political plan of unfocused spending, which caused more buying of cheap goods from china …
2. Yes that’s exactly what R&D relief is… well… close enough.The government will give you cash back on your research and development expenditure… wherever it is conducted in the world provided it’s for the UK company trade.

Well bank transfer, but yes… cash.

Timbuktu is a small village on a river in Africa… so no mountains. But yes.

R&D begins when you find a problem and a competent professional in his field (of the problem) thinks this would require an advance in science or technology to solve

Basically, you have a technical problem in something you are trying to do which is commercial in nature for the business. You are knowledgeable in the area of the problem (not the world’s expert, yet to publish a book, but hell, you know your stuff and you work in this area)… and you think to yourself… I don’t know how to solve this. Therefore R&D begins. And it either ends because you fail to solve the problem, or because you create something new that does.

Doesn’t count, it must be within the public domain for you to be able to solve it without R&D from generally accepted knowledge. A key point is before R&D begins, you should look around and check that a solution isn’t in the public domain already.

It’s probably important to know where the R&D for Science or Technology rules come from. Originally it was just ‘Science’. Where knowledge, and the state of the art is a public thing. Scientist publish papers, peers rip them to shreds and occasionally cry, and then write replies and new papers. But it’s all out there. What happened is they added ‘Technology’ to these rules as well as Science. However technology isn’t a science per say, and isn’t something that is public… Apple are definitely not publicly publishing all their IP while Samsung take it laughing their Korean arses off. But do note, Human Sciences don’t count.

Because if you count human sciences you suddenly are able to count every piece of marketing that has ever been done. There is so much the sales and the marketing dept could apply to R&D if you allow the study of the behaviour of humans.

And you know what you are talking about… and it’s science (but not human sciences) or technology… then probably R&D begins at that point, to solve the problem. R&D ahoy…. and you make a good point – uncertainty needs to be present. A competent professional says… I don’t know if this can even be done.

Then – R&D is happening. Now you merely need to write up exactly what this issue is/was and then match this with your costs, which are quite specific. They are namely

• DIRECT STAFF – Full salaried costs proportioned to the time spent on the problem
• INDIRECT – The time of those managing the R&D team
• EXTERNAL – External consultants or subcontractors, anywhere in the world.
• CONSUMABLES – Anything “used up” in the process

You can claim anything that was used up during the R&D.. so power, pencils, test tubes, materials you used and didn’t have any of them left at the end…But not your rent, or your servers… you will have a building at the end of it, and the server.

Means managers’ versus development staff. So if you had a company you ran with 20 employees, half of these dedicated to R&D… and you managed everyone… you could claim half your time. The same goes for R&D staff in terms of you apportion their time to the different R&D projects. Ideally by time sheets, but otherwise by going through their diaries and workflow and working out how long they have been working on particular problems.

Decide if you want the cash back (if you are loss making) in exchange for your loss… or whether you just want to claim an enhanced loss…

So if your company has made a loss of say £1m for the year, and part of why you made this loss is you spent £500k on R&D.

You can claim this R&D element and either now call that loss £1,650k.

Or you can only make a loss of £500k and surrender the part that is R&D and instead get cash of £ 165,000.

Okay bank transfer – £166,750 would be the size of it in this example… broadly 33% of your R&D costs of £500k you identified. Note this is the small company scheme. I’m skipping telling you about the RDEC scheme for large companies (100million Euros Turnover Worldwide, 86million Euros Gross Assets, 500 People.) It’s pretty similar but you get a lot less money.

You put one, or perhaps two numbers in your corporation tax return that you do anyway, and send them a copy of this with your report. Within 28 days you will get either the money or be told they want to ask more questions.

Eh? watch out for year ends after 1st April 2020 as the cashback element will be capped to 3 x your contributions as a company to tax and national insurance from your workforce, but there is more good news…

IWell you should be, and you should be less cynical, it’s Christmas..

Clark… well, the better news is that you have 2 years to make a claim… so that means if your year end says 31st December, you have till this 31st December to claim for the years ending 31/12/2016, and 31/12/2017. There are also companies that will lend you next year’s money btw – specialist lenders.

It’s actually an incredibly generous scheme. It’s a grant scheme operated through the tax system, and you really should be positive about it. It’s very attractive to companies internationally who choose to put more IP in the UK and employ more workers in the UK. Many countries have a scheme, but few are as good. Australia might be more generous but the process is very onerous. Spain sounds good but never actually pay out the cash… just by way of example. Businesses that are heavily involved in R&D (and it can be quite surprising examples such as farmers or architects) can reduce their cost of development, therefore reduce the amount they need to raise, and therefore reduce the amount of equity they need to give away. Front and centre of your planning when capital raising is the potential positive impact for R&D. Start-ups that are struggling to compete with cheaper overseas rivals can lower the cost of the development team. R&D should be front and centre of your planning when capital raising is the potential positive impact for R&D, or looking at your employment costs internationally.

Well no, but it’s a helpful example…

1. We are a partnership – and you need to be a limited company, or under the duty to pay UK corporation tax (like a foreign entity with a UK branch can be) in order to claim the relief…
2. We are paid by the hour (hopefully)… and as such we are fully recharging our work, and so are not at risk for our work in terms of cost. This means as we are recharging our work ….if we are doing R&D… it is the client who gets the benefit and should be claiming it. And…
3. We aren’t really solving unknown problems in science and technology

Not if you are charging all of your time, and/or don’t own the IP you create. It needs to be for your trade, you need to be incurring risk (so you could be under a fixed fee), and you would expect to own the IP you own at the end of it. These rules aren’t black and white there are instances where you might know the IP but it’s still R&D, or you are charging for the work, but it’s still R&D – but that’s where you would need advice.

Video Games Tax relief.

Nope. But you get to make them and get financial help.

Effectively, thanks to the Canadians coming up with such a generous scheme and nicking all our developers… UKIE and TIGA lobbyed the government to support Video Gaming in the UK (as we were world leaders in it) and amazing the Tax man agreed.

They agreed that provided you do enough of it in the UK (or currently the EEA due to EU rules, but you know… maybe… like maybe… this thing is happening) .. and/or what you produce promotes British culture… you can get 20% back of your costs – broadly.

Well a bit, not as good as R&D but you can outsource up to £1m anywhere. The way the rules work you don’t want much outside of the EEA, and you must do at least 25% of your development in the UK/EU or you start restricting your relief. You need to be the company most closely associated with the development of the game… and you need to get a certificate from the British Film Institute to cover the above.

Actually not too bad, they are very lovely people at the BFI.

Well, maybe. But don’t be put off by the whole British Culture thing. You don’t have to get a single point in this section if you do enough of it in the EEA, and it is really not hard to qualify for the certificate, and they will support you with it from start to finish.

Yes either a bigger loss you can use against the game’s success – or you can get some cash. Less than R&D but the good news is it’s all on expenditure “just and reasonably apportionable” to the design, production, and testing of the video game.

Everything that is “just and apportionable.”…

It means HMRC don’t want to get into giving out lists or rules, you need to work it out for yourself. It’s self-assessment don’t you know?… But broadly, somewhere making video games as a focus could claim much of its overhead, rent, light, heat, salaries, etc. A more detailed overview of all the rules can be found here

You can, but they need to be entirely separate ventures. You can’t start R&D which has bubbled out of a Video Game you are making. You would need to on the one hand solve a problem, and on the other build a game. The game could utilise your R&D knowledge, but R&D can’t come from a game if you follow. Also note there are actually a whole range of other tax reliefs related to films, animations, theatre, orchestra, and museums and galleries. They all work in similar ways to the Video Games Tax relief, but are for specific other areas. We just can’t talk about them all, and well, Video games is the newest, and maybe the most relevant currently…

Ermm… oh yeah…. just one more thing…

It’s something for you… it’s a letter from the Taxman…

It says Happy Christmas Clark. Don’t forget to do your tax return on time.