A study of companies who thought they were eligible for R&D tax, but weren’t!

29th Oct 2020
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Often, when R&D tax relief experts talk about clients and eligibility, they’ll focus more on the successful cases, where they were able to pull together a robust and compliant claim for a nicely eligible client. This can, of course, be very helpful when you’re trying to identify which of your clients might be eligible, but it doesn’t tell you the whole story. What about all of those times that the expert rocks up to a client they expect to have loads of eligibility, only to come away empty handed? Wouldn’t that be just as helpful when you’re assessing your client list?

Well, here you are – a selection of the stories we’ve gathered from companies that were convinced they had lots of eligibility, only to find out that they either had none, or were unable to claim due to the way they structured their business.

Installation of new production machinery

This company was a food manufacturer specialising in the production of bread and cakes, who felt that they should be eligible to claim R&D tax relief on the cost of developing and installing a new production line. They had spent tens of thousands of pounds on their new machinery, which enabled them to increase output five-fold. All very impressive, and, on the surface, very technical.

However, upon further investigation, it became clear that the food manufacturing company had not done any technical research and development. Rather, they’d spent a lot of time and effort working to identify which off-the-shelf solution was the most suitable for their purposes, and then paying the manufacturer of the production machinery to make specific alterations to fit their criteria. They didn’t make any technical advances, and they didn’t resolve any technological uncertainties, so were unable to make a claim.

Subcontracted design work

My next example is of a company that went through an extensive screening process at an R&D tax consultancy, and still turned out to be unable to make a valid claim. This SME specialised in technical design, prototyping and research and development, so should have been a slam-dunk – how on earth could they be ineligible?

Well, it all comes down to how they did the work, and the types of companies they worked for. All of their (very eligible) R&D projects were undertaken on behalf of SMEs. Now, as anyone who is familiar with CIRD89500 knows, SMEs subcontracted to undertake R&D on behalf of other SMEs cannot make a claim for R&D tax relief, because, under the rules of the scheme, the subcontracting SME could make an R&D claim for these costs. Unfortunately, this left the design company looking at a whole load of eligible work but unable to make a valid claim.

Non-existent costs 

This next example is another illustration of how a company can have been carrying out eligible R&D and still find themselves unable to make a claim. The guys were a small start-up doing a lot of research into the chemistry of paints for outdoor applications and had masses of eligibility. However, like the example above, they were caught out by the way they had done their work. 

Essentially, like most start-ups, these guys had chosen to work for the company for free while they developed their first product. They had begged, stolen and borrowed reagents, and worked out of someone’s spare room. While this might have made solid financial sense, it meant that they had spent nothing on their R&D, and therefore couldn’t make a valid claim for R&D tax relief.

Non-technical technical work

This last company again seemed on the surface to have plenty of eligibility. They specialised in the manufacture of lighting and electrical components, and many of their products were commercially innovative or market-leading – they definitely expected to be able to make a substantial claim.

However, on closer examination, the company did little development, and no research whatsoever. They had a very good design team who kept up a constant flow of good ideas of new, commercially innovative products that were passed to the product team to build. The product team would then construct these new products from off-the-shelf components, and where this wasn’t possible, the company would reject the product idea. Like the first example above, they didn’t make any technical advances, and they didn’t resolve any technological uncertainties, so any thoughts of claiming went out of the window.

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