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How to use R&D Corporation Tax relief in franchising

Written by James Thomas on Wednesday, 24 July 2019. Posted in Analysis

Franchisors and franchisees must keep innovating, not just to stay ahead of the competition but also because of some sweet, sweet tax cuts

How to use R&D Corporation Tax relief in franchising

Innovation in any company is a sure-fire way to stay abreast of your competition, develop your model and ensure you’re still the forerunner in your given field. So, what if I told you that you could not only innovate, but also make whopping tax saving in the process.

I recently sat down with d&t’s specialist tax manager Richard McDermott and he’s let me know about an interesting and important tax break for companies undertaking research and development (R&D) work, which I thought I’d share with you.

Rules currently being promoted by HMRC, could be relevant for any franchisor working on new products or services, or for any company considering longer-term R&D projects. Tax relief can even be claimed on unsuccessful projects, so now might be time to get your thinking caps and potential lab coats on for a bit of innovative product planning. “R&D tax relief is designed to support companies that work on innovative projects in science and technology, “ McDermott said. “It can be claimed by companies that seek to research or develop an advance in their field.” 

Now concentrate, because I know I had to. Here’s the technical bit: to claim R&D Corporation Tax relief your franchise’s project needs to meet specific criteria and if so, the R&D qualifies for an additional 130% of qualifying costs to be claimed for tax purposes. So, for a company qualifying for £100,000 worth of R&D, there are additional qualifying costs of £130,000 taking the total to £230,000.  This is a huge amount.  It can reduce the corporation tax liability by £130,000 times 19% equals £24.700. Alternatively, if the company records a loss, a repayable R&D tax credit of 14.5% can be claimed, resulting in a welcome cash boost to the business.

McDermott and his team have just completed an R&D claim for a client, which should result in a corporation tax repayment of £63k. This is just one example of significantly valuable tax break for Limited Companies undertaking R&D work and well worth the effort to see if suitable projects qualify.

So, what are the criteria that need to be met to claim these valuable tax breaks?  HMRC states: “The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science like economics or a theoretical field like pure maths. The project must relate to your company’s trade - either an existing one, or one that you intend to start up based on the results of the R&D. Your project may research or develop a new process, product or service or improve on an existing one.”

So, the key point is, any franchisors looking at developing new and innovative products or improving processes to ensure they meet the criteria is key.

Any advance in a field of science or technology which extends the overall knowledge in the given field and not just the company’s own state of knowledge or capability could qualify for a hefty rebate. It can’t just be an existing technology that has been used for the first time in your sector. The technological challenge will not have been able to be readily resolved by a competent professional in the industry and it will be necessary to show how the scientific or technological uncertainties were faced and how these were overcome. According to HMRC: “This can be a simple description of the successes and failures you had during the project.”

There’s more information about this which can be found on the government’s website. However, often dealing with such specific rules and regulations, if you are not doing so every day, can seem a little overwhelming. That’s why it’s helpful to work with accountants and advisors who understand the details and can cut through the jargon to guide you through the process. In this case, it could be well worth chatting in advance of completing any R&D type project, to ensure all your hard work is recorded correctly and therefore recognised by HRMC to qualify for this valuable tax break.

In the meantime, why not have a think about what R&D projects your franchise company could get involved in? 

About the Author

James Thomas

James Thomas

Having worked within the franchise industry as an operations coordinator in the past, Thomas has developed experience of facilitating the relationship between franchisor and franchise network, which led him to become franchise relationship manager at d&t chartered accountants

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