Most common overlooked expenses when making an R&D tax claim

19th Aug 2021
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A mistake companies commonly make when applying for R&D tax credits is overlooking qualifying expenses. Often they tick off the obvious R& D expenses such as consumables and staffing costs, and leave it there. The reality is that the list of qualifying R&D expenses is long and doesn’t only feature obvious costs. Without knowledge of it, your client won’t know the true value of their claim. As a result, they may not want to even pursue R&D tax credits in the first place.

The bottom line is that your client could be missing out on savings by overlooking certain expenses. This blog post is here to make sure that doesn’t happen. Read on to learn about the commonly overlooked expenses your client should be aware of.

The importance of identifying qualifying expenses

The worth of your client’s R&D tax credit claim gets determined by the qualifying projects and expenses. This is because the value of an R&D tax credit claim gets calculated as a percentage of the total qualifying expenses. Therefore, any overlooked expenses will directly reduce the amount your client is saving through their claim.

On the other hand, including all the available R&D expenses in a claim will ensure that it gets maximised. This will guarantee your client gets the most financial benefit possible from their R&D tax credit claim. Identifying your client’s qualifying expenses ahead of time also allows them to plan for the future. As your client’s accountant, having this accurate projection of how much of a saving they will make is very valuable.

Read more about the range of qualifying R&D expenditures here.

Commonly overlooked and missed R&D expenses

Far too often businesses miss out on claiming for expenses that qualify as R&D. These expenses usually come from processes that occur naturally when R&D projects are being undertaken. Some get derived from events in a company’s lifecycle that happen quite regularly. There is a misconception that R&D expenses have to break new ground with revolutionary new products to qualify. Not so. Money spent making improvements to existing processes and products will also qualify as R&D expenses.

  • Clothing

Clothes have the potential to qualify as R&D in many ways. A lot of the time innovation involves processes that are dangerous. Operating heavy machinery, for example. As a result, protective clothing gets included as part of necessary health and safety measures. 

Clothes can also qualify as consumables if they get damaged beyond use during the R&D project. However, clothes bought before your client’s two most recent accounting periods cannot get included in a claim.

You can read about the timing parameters of R&D tax credit claims here.

  • System migrations

Companies usually migrate their systems to improve their data storage and task allocation. This often involves design changes, improvements and the overcoming of technical uncertainty. As a result, the process of moving the data may incur qualifying R&D costs. Nowadays, system migrations utilise cloud-based technology to boot. Migrations without the use of this modern technology have not typically qualified for R&D tax credits.

One instance where system migration always takes place is during the merger of two companies.

  • Efficiency-improving automation

This is often a feature of workflow and manufacturing processes, such as assembly lines. Here automation tools take the form of robotic servo arms, or automated shelving and labeling systems. With regards to robots specifically, there is technical uncertainty in how they will perform and where is best to place them. These factors result in trial and error, the costs of which can get included as qualifying R&D expenses.

It must be noted, however, the material costs of the robot cannot be included. R&D only concerns the testing and design costs.

  • Replacements for an obsolete part of a product/process

This is a common occurrence when a certain part of a product is no longer made by an external supplier. If an adequate replacement cannot get sourced, the product business must innovate. This will prompt design changes, material changes and potentially changes to the product’s functionality. 

Furthermore, when the obsolete component becomes outdated, using new technology can be the best course of action. This will involve a lot of testing and maybe the development of prototypes. Both of these things and more can get included in your client’s R&D tax credit claim. If they can provide in-depth evidence of their R&D process, then their qualifying expenses will broaden. There is also potential to include the designers’ wages, as well as those of the engineers.

  • Machine learning

The use of machine learning or artificial intelligence (AI) results in processes becoming quicker and more efficient. It also combines well with the other products and processes featured in this list. For example, AI could help educate your client on how best to use their new robotic arm. So although machine learning has become widespread in fields such as manufacturing, it has applications in almost all processes. As such, this is definitely one to consider when making your client’s R&D tax credits claim.

  • Cloud computing/networking

There is a bit of a caveat to this one, as it is still in the process of being included as a qualifying cost by HMRC. However, it would be unhelpful not to include this as so many businesses now engage in networking and cloud computing.

Leasing a cloud platform/server results in innovation by granting greater computing power to other businesses. This only applies if the cloud gets accessed outside of the provider’s premises. The provider incurs a cost of housing and running the necessary physical computing power. These cloud services qualify as R&D because they get used to visualise design concepts and beta test software programs.

made.simplr will make sure your client doesn’t miss out

The advice here is for your client to take their time and think outside the box. Businesses don’t always have that luxury though. That’s where made.simplr come in.

Our state-of-the-art R&D tax credit software makes the claims process as easy as possible. In addition, our team of experts guarantee to accurately identify all your client’s qualifying R&D expenses, including expenses you or your client might have overlooked. This will ensure your client’s claim delivers them the maximum benefit possible.

Book a demo today!