Can Directors' Dividends Be Included In A Claim For R&D Tax Credits?

At Myriad Associates we receive many different questions from clients each week about the specific items they can claim for when applying for R&D Tax Credits. A particularly common one is whether dividends are allowed, so here we take a look.

What are R&D Tax Credits and what qualifies?

R&D (Research and Development) Tax Credits are a government-backed tax incentive aimed at encouraging UK business innovation. They’re an important and lucrative source of cash which can help accelerate a company’s R&D work by taking on more employees and ultimately growing. The relief was introduced in the year 2000, and has been increasing in popularity year on year.

It works by allowing UK companies to claim a relief on their Corporation Tax. This can be either as a reduction in the amount payable, or as a cash lump sum. The beauty of it is that all companies are eligible to apply (as long as they pay UK Corporation Tax) and no claim is too big or too small. A company doesn’t even need to be in profit to claim R&D Tax Credits either - it’s open to loss-making companies too.

The thinking behind R&D Tax Credits is that the extra money a company ends up with can then be invested to help it grow. The purchasing of more materials and taking on new staff for example then ultimately boosts the government’s own coffers via the tax system. The company wins, and the economy wins.

In terms of the costs that will qualify for R&D Tax Credits, the range is incredibly broad (as is the R&D project work itself in fact). If money has been spent on developing new products, services or processes, or making improvements to existing ones, then the work is likely to attract R&D Tax Credits. It’s all about being innovative, and making an advancement in science or technology that’s not singularly just of use to your company, but to the wider industry as a whole. The scope for identifying R&D is massive, and exists in all sectors. Companies claiming for the first time can generally claim R&D Tax Credits across their last two full accounting periods, and the project doesn’t even have to have been a success. Again, it’s about the journey of the scientific and/or technological discovery, and not so much about the destination.

Which R&D Tax Credit branch of the scheme should I claim under?

The R&D Tax Credits scheme is divided into two branches, and the one you choose depends on how large the company is and whether it has received any state funding before. This would be something like an R&D grant for example. The first branch of the scheme is for small and medium-sized enterprises (unsurprisingly therefore called the SME scheme) and the other is called RDEC (Research and Development Expenditure Credit).

Generally speaking, to claim R&D tax relief using the SME scheme, a company must have less than €86 million in gross assets and under €100 million in turnover. It must also employ no more than 500 people. The majority of companies, including new start-ups, usually fall into this category. The exception would be if the company has also received government-backed financial assistance, in which case RDEC would need to be used regardless of company size.

As you may have now worked out, the RDEC scheme is typically for larger companies. This would be organisations that have more than €100 million in turnover or over €86 million in gross assets, as well as 500+ employees.

The SME scheme allows businesses to claim back up to 33 pence in every £1 of R&D expenditure. This is very generous and can be worth tens of thousands of pounds to a company that they can’t afford to miss out on. The RDEC scheme is less generous at 10 pence per £1 spent, but don’t forget that as companies using this branch tend to be much bigger, so too are their claim values.

Myriad Associates can assist SMEs across every sector in how to maximise their claim value ready to reinvest back in their businesses. We can also talk to you about how to best claim grant funding and R&D Tax Credits together.

What kind of costs will be eligible for R&D Tax Credits?

The trick is in identifying costs that are only in relation to the R&D work itself (i.e the creating of a new product/service/process, or the improvement of an existing one). It’s not always easy to what R&D project costs are specifically, and what are simply everyday business costs. This again is where we can help you to make sure you maximise your claim and don’t accidentally claim things that don’t qualify (which can get you into hot water with HMRC).

As a guide, the following costs can typically be included in an R&D tax relief claim:

• Staffing costs, for example, wages, salaries, reimbursed expenses, employer’s pension contributions and NICs
• Payments made to freelancers and subcontractors
• Certain types of software, for example if you’ve had to design a piece of essential software in order to complete your R&D work
• Materials and consumables used up specifically in the R&D project concerned - this might be fuel, light and heat
• Payments to volunteers for clinical trials.

So can directors' dividends also be claimed?

This part is important. Directors’ dividends are not classed as eligible expenditure when it comes to R&D, therefore they should not be included in an R&D Tax Credit claim. From a personal tax point of view, it’s usually more efficient for directors to gain remuneration via dividends, instead of a salary. However, if a director is significantly involved in R&D work, their dividends may have a sizeable impact on the value of an R&D tax relief claim. This is because employer pension contributions and salaries are eligible expenditure for R&D tax relief as mentioned above, but dividends are not.

Want to know more about R&D Tax Credits?

Information about R&D Tax Credits and how to claim can be found on our website, or feel free to call us on 0207 118 6045. Alternatively use our contact page and one of us will call you back. Myriad Associates is made up of a friendly team of accountants and tax specialists who deal solely with R&D tax relief claims and can help you make an accurate, maximised application. We look forward to hearing from you.