We’re seeing more and more companies, large and small, collaborating with universities via KTPs allowing academics to exchange skills and research with entrepreneurs. When it comes to claiming R&D tax credits, KTPs can be somewhat confusing.
The arrangement between a University and a Company under a KTP scheme
When a company and a university work together under a KTP arrangement, the university typically appoints one or more Ph.D. students or research associates to work on the relevant R&D project with the company.
The company then pays the university towards some of the salary costs of the team – typically 30% to 70% of the costs. The remaining costs are state-funded, which means the university gets paid directly by the government.
Because the payment of the university costs is partly state-funded, businesses often believe this disqualifies them from claiming R&D tax credits under the SME scheme, and that rather the business should be claiming under the RDEC scheme, which is far less generous.
Fortunately, this is not the case.
Why businesses can claim under the SME scheme
In a KTP arrangement, the company is not in receipt of any state aid, meaning all the company sees is an invoice from the university which is then settled by the company. The university gets paid directly from the government, and so, the business is not directly in receipt of any state aid.
So what can the business claim when making an R&D tax credits claim?
For R&D tax credits purposes, the payments to the university are treated as payments towards an Externally Provided Worker. This means that for every £1,000 paid to the university, the business can claim up to 65%, being £650 as qualifying expenses in the respective R&D tax credits claim.
How do I increase the value of the R&D claim?
The good news is that the business is able to increase the value of the R&D tax credits claims and requires the co-operation of the university.
Quite simply, if the university provides and discloses a detailed analysis of the actual salary costs incurred, and both parties agree to be treated as ‘connected” for R&D tax credits purposes, then the company can claim the full amount of the invoice as qualifying costs in their R&D tax credits.
The company needs to simply have a letter in place, signed by both parties, and elect to be connected.
How do the numbers work?
Let’s assume that a loss-making SME company and a university are working together under a KTP arrangement and that the company is expected to pay (say) £50,000 to the university for a contribution towards salary costs for a Research Associate working on an R&D project
The university will pay the other £30,000 using state-funded government money.
Claiming R&D tax credits as a normal Externally Provided Worker
In the absence of a ‘joint-election’ arrangement, the company will claim 65% of the £50,000 as qualifying costs in the R&D tax credits claims, being £32,500. This would result in an R&D tax credits claim of £10,838.75.
Claiming R&D tax credits as a ‘connected-party’
Should the university and company elect to be connected with each other, then the full £50,000 can be claimed as qualifying expenses for R&D tax credits purposes. This would result in an R&D tax credits claim worth £16,675.00.
By getting the university to collaborate with the company, the company can increase its R&D tax credits claim by 53.8%!
So it’s very important to understand the nature of the arrangements between a company and a university or research organisation and appreciate who is really in receipt of the state funding. By carefully considering all the parties in the equation, the company can increase its R&D tax credits claim by over 50%!
At RDvault, our platform helps companies identify such opportunities and increase the value of claims by tens of thousands of pounds with very little effort involved.
You can find out more on this topic by contacting RDvault, and we’ll happily explore your claim with you.