The UK is well known internationally for having a generous and effective R&D tax incentives system. This includes the SME R&D Tax Credit, RDEC and the Patent Box.
As a specialist in this area I’m asked increasingly by tech and biotech firms for practical advice to convert the headline statements into real-world benefits. These requests come both from UK firms looking to attract overseas customers, and also from overseas firms who want to take advantage of UK talent and get the best value for their investments.
I thought I’d look at a couple of scenarios, and how to best structure things to make the best use of available benefits. Note that some of these arrangements are likely to be disproportionately affected by the recent decision by HMRC to impose a cap on payable credits.
I’m not going to cover the “standard” scenario of a UK company developing products for overseas customers. In that case the company can simply claim R&D tax credits in the usual way – if this applies to you take a look at this page for more information.
Scenario 1: Using UK firms as subcontractors
- When an overseas firm has no UK presence, it can subcontract some of its R&D work to a UK based specialist.
- The UK firm can then take advantage of the R&D Expenditure Credit (RDEC), even if the work they do would not on its own qualify for SME R&D tax credits.
- The UK firm effectively gets a 12% boost to their profitability on the job, allowing them to pass that saving on to the overseas client and allowing them to be more competitive.
- Examples of this kind of arrangement might include a biotech or pharmaceutical business engaging contract research organisations, or technology firms wanting to access world leading software and hardware development expertise.
- For more information on operating this way, take a look at this article where we go into more depth.
Scenario 2: Establishing a UK subsidiary
- Where the planned investments in R&D are more significant (probably £500k and above) it is worth considering establishing a UK presence.
- Assuming the business qualifies as an SME (broadly speaking this means fewer than 500 employees), they can be eligible for tax benefits of up to 33%, allowing that R&D investment to go much further.
- The UK subsidiary would direct the research, allowing it to employ UK based expert staff directly as well as negotiating contracts with subcontractors to handle specialist parts of the project. Subcontractors are not required to be UK based, allowing the subsidiary to act as a global hub for R&D.
- Note that a scenario where most or all of the R&D is subcontracted out of the UK would be an obviously artificial arrangement. As such it would most likely be rejected by HMRC, and will also fall foul of the anti-avoidance measure proposed to come into force during 2020. For (hopefully!) obvious reasons you also can’t subcontract back to the parent company.
We’re skipping over some details here, and this is clearly an area where you should take expert advice on your specific situation before proceeding. Where we have seen this work particularly well is when a consortium of UK based firms in a related field get together to attract an overseas client.
WOCO is working with a number of clients operating in line with both scenarios above. Feel free to give us a call on +44 7752 057553 or e-mail at firstname.lastname@example.org to discuss your specific circumstances. As we work on a “no claim, no fee” basis, any such up-front advice will be free of charge!