So, what happens if you have a client who is carrying out a creative project that involves innovation eligible for R&D?
The short answer to this question, in most instances (particularly SMEs) is that you can only claim for 1 of these innovative tax reliefs on the SAME expenditure. You must choose the most favourable relief to claim and document the reason for choosing the relevant relief.
However, there are few exceptions to this rule which you are detailed below such as clients claiming RDEC.
In a lot of creative businesses, you will find the project teams searching for new, more efficient ways to do things and working on solutions which overcome technical issues. An example may be to write code to improve special effects in a TV or film production. This type of work would be eligible for R&D tax relief.
Let’s consider the scenarios where this might come up and how it could practically work
DATES
Firstly, it would depend on WHEN the innovation is carried out.
Creative tax relief is only allowed on expenditure at certain stages of the project whilst R&D relief can be claimed for the whole project.
For example, you can only claim for the costs of producing and closing a theatrical production. If the innovation happened outside of this period say at development or when running the production, an R&D claim would be possible as the expenditure would be incurred for different reasons.
If you found that the SAME expenditure was incurred on a project which you could claim both creative and R&D tax reliefs, you would need to calculate the two possible claims and determine which one is the most beneficial.
It may be easier for the company to claim the R&D relief for the expenditure as there are less hurdles to making the claim such as applying for a BFI certificate.
SEPARATE TRADES
If the company was involved in a creative project but had a separate trade which involved innovation, both claims are possible as they will be claiming relief on separate expenditure incurred on separate projects.
SEPARATE COMPANIES
In some cases, the business is set up as separate companies or single-purpose vehicles for different activities.
Each company will carry out one activity such as video game development and the other will carry out the R&D work to create a new video game console.
If this is the case the companies can claim for the different tax reliefs separately.
COMPANIES CLAIMING RDEC
Large companies and small to medium-sized companies who have received grants, or they are carrying out sub-contracted work for a large company are entitled to a less favourable R&D scheme called RDEC.
If your client has made a profit the effect of the claim is to reduce the company’s Corporation Tax liability by 8.8p for every £1 spent on innovating and problem-solving.
If your client has made a loss HMRC will make a cash payment to them of up to 8.8p for every £1 spent on R&D activities.
These companies can claim both RDEC and creative tax relief as RDEC isn’t a state aid. There is one exception – video games development. Sadly, this doesn’t mean double tax relief! It means that they can claim creative tax relief for any expenditure which is not covered under RDEC. The same principles apply but this may mean more relief can be claimed than expected.
But why aren’t companies being rewarded for being BOTH creative and innovative?
Well, in fact, they are.
The reliefs were introduced to incentivise two different types of innovation. They both enhance the expenditure of the business and give benefits to companies who are profit or loss-making.
If the same costs are incurred doing the same thing, it isn’t in the spirit of the relief for you to be able to claim effectively double tax relief.
Some may argue that you should be given more relief than what is available for doing both. As mentioned above, it is unlikely this scenario would arise. The same expenditure is unlikely to be incurred on BOTH activities at once.
We need clarity!
In my opinion, HMRC needs to give greater certainty over this area and explain the interaction of the reliefs in a much clearer way. It would take some effort for a business to research this in full and make sure they are taking the correct course of action.
This area should be made clearer for taxpayers and their advisers so they can see when they can claim one or more of the reliefs in an effort to ensure that the taxpayer who is entitled to the relief actually makes a claim. It makes me wonder how many clients have claimed for the wrong relief, not claimed enough or haven’t even claimed at all….
If you have a client who you think may be able to make a claim for one or both reliefs or want to find out more about these areas, contact me via samantha.hind@diagnostax.co.uk