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

2nd Nov 2020
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When you approach clients to discuss R&D tax credits, their responses generally fall into four categories. After listening to your clear and precise description of HMRC’s criteria, a chunk of them will say that they don’t think that they’re eligible, and they’ll be right. Another section will immediately realise that their work is eligible, and they’ll also be right – great! These two categories are generally quick and easy to deal with, and you’ll find yourself wishing that all clients could be this straightforward. 

The final two categories are a lot tricker to deal with. We’ve discussed clients that think they’re eligible and turn out to be unable to claim before, but what about those clients that think they’re ineligible when in fact they have loads of eligible work to claim for? Well, here are some examples that we’ve come across over our time in the world of R&D tax clients who were very sceptical about their chances of making a successful claim.

Subcontracted R&D

Our first example is an engineering company that specialised in producing parts for the automotive industry. The company knew they were doing a lot of very technical R&D but believed that they couldn’t claim R&D tax relief because most of this was done under contract. They had assumed that being paid to carry out R&D meant that any claim they made for R&D tax relief would be invalid. 

However, as those of you who are familiar with the rules around subcontracted R&D will know, the company was only partially right. It’s true that R&D tax relief cannot be claimed for any R&D done under contract to an SME, so some of the work couldn’t be included in the claim. But, after a thorough examination of the projects undertaken by the company, they were able to identify work done under contract to Large Companies, enabling them to make a claim under the RDEC scheme, and smaller projects carried out at their own risk and expense that could be claimed for through the SME scheme. The company ended up with a substantial and, more importantly, entirely compliant claim for R&D tax relief. 

Development of new processing machinery

Clients that find it difficult to see their eligibility are often struggling to see beyond their core business activities. A good example of this is a company that specialises in the production of vegetables. They had looked at the scheme and had concluded, quite rightly, that the growing of vegetables using standard techniques would not qualify for R&D tax relief, and turned their attention to other ways to enhance the company’s finances.

However, the company wasn’t entirely correct in their assessment. They had neglected to consider the engineering arm of the business that was responsible for developing new and advanced machinery to process the vegetables. When this part of the business was examined, it was easy to identify a whole slew of technical advances that had been made, along with a load of technological uncertainties, and the company were able to make a substantial claim on this basis.

Hidden eligibility

Sometimes, of course, it’s the advisor that’s sceptical about the chances of a company having a legitimate claim. One such example we came across recently was a marketing agency who were absolutely convinced that they had eligible work. We did our background research and couldn’t see how this company could have a claim – they presented themselves as a basic digital marketing agency and didn’t seem to be doing any technical R&D at all. We decided to speak to the company as a curtesy but had no expectations of their having any eligibility. 

All this changed, however, within minutes of starting to talk to their technical guys. Under the umbrella of digital marketing, they had actually been doing some very advanced work in the areas of big data and artificial intelligence in order to analyse masses and masses of marketing-related data for their clients. They were making very obvious advances in software and data science and were able to pull together a really eligible and compliant claim.

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