How having connected companies impact SMEs R&D Tax Credit Claim
When filing an R&D tax relief claim, there is a specific guideline of the type of costs that qualify. If you want to learn more about that the type of costs that are eligible to be included in your R&D claim, you can read our article here.
If an SME claiming R&D tax relief has a connection with the subcontractors and/or externally provided workers, specific rules apply.
What is a connected company?
There are several ways where companies can be deemed connected.
- Family relationships (civil partner, spouse, relative etc)
- Common ownership and control
How does having a connected company impact a company’s R&D tax claim?
If an SME hires unconnected subcontractors or EPWs for its R&D activities then they can claim 65% of the costs as tax relief. If the subcontractors or EPWs only work part-time on the R&D activities within the company, appropriate apportionment must be made.
However, if a connection is identified, then the claim value is generally less than 65%. The expectation is that the invoice or cash exchange will not be at market rates, thus no profit margin. Although it is important to look into the actual costs incurred by the subcontractor, not just the amount paid to them by the claimant company. This measure is put in place to stop companies artificially inflating their invoices to increase the value of the R&D tax claim.
Some claimant companies and subcontractor / EPW providers can also elect to be connected, which in certain scenarios can maximise the claim. Practically speaking, this will require knowledge of the profit margin and base costs of the subcontractor/EPW as it is generally only beneficial if the profit margin is less than 35%. Any election applies to all payments under the same contract or arrangement and is usually made as part of the claims process.
We recognise that these calculations and the understanding of the specific rules when claiming R&D tax relief can get complicated. That’s why in our R&D tax solution Novel we have a specific section that helps ascertain whether you are a connected company. Depending on what you add, it’ll tell you the correct next steps. You can try Novel today and get the first 3 months FREE.