R&D tax credits: myths, misconceptions and missed claims
The myths and misconceptions surrounding R&D tax credits are leading to businesses missing out on valuable financial benefits. Many of these myths concern which companies qualify for R&D tax credits, as well as what defines R&D work. These myths and misconceptions predicate the fact that R&D traditionally gets associated with certain companies and fields. The end result is companies decide they aren’t eligible for R&D tax credits without researching if this is the case.
Due to this, there are many UK businesses that could be claiming R&D tax credits but aren’t. Most eligible businesses are SMEs and as a result, could find a successful R&D tax credit claim to be life-changing. In 2018, research by tax relief specialist Catax estimates that around £84bn is going unclaimed by SMEs. It found 57% of the 3.5m UK SMEs were eligible under the SME scheme, with only 1% of these businesses claiming.
Many experts are employed by companies to help them understand what qualifies as R&D. Knowing this helps to dispel many of the rumours surrounding claiming R&D tax credits. You’ve come to the right place if you want to convince your client to investigate claiming R&D tax credits. In this blog, you’ll find all the common myths and misconceptions around R&D tax credits. More importantly though, you’ll find out if your client can in fact benefit from R&D tax credits.
Myths & misconceptions
A lot of the time business owners get put off claiming R&D tax credits because of their assumptions or misconceptions. Here you can find all of them debunked.
- My client has to be working in a scientific or medical field to claim – false
It may be true that the fields of science and medicine offer businesses more opportunities to undertake R&D work. However, a major misconception is that these are the only industries that qualify. R&D tax credits are open to businesses from all sectors. The key defining factor in R&D work is whether it achieves a scientific or technological advancement. It also has to solve an uncertainty that exists within the company’s field. On top of this is the progress of technology in recent years concerning digital software and online services. This has opened the door for innovation within many business sectors, from manufacturing to textiles to transport to retail.
- My client can’t claim because their R&D work has been undertaken by a subcontractor – false
Although it is work not physically completed by your client, the R&D project is still of their creation. As a result, 65% of the cost of subcontracted work is claimable. If your client is a connected company with the subcontractor in any way, this increases to 100%.
If your client is the one contracted to undertake qualifying R&D work they can also be eligible to claim. However, the following factors will influence if they can claim R&D tax credits for the work:
- The exact contractual situation of your client.
- The nature of the work your client is undertaking.
- Who bears the brunt of the qualifying costs.
Be warned though, calculating subcontractor costs is one of the more complicated areas of an R&D tax credit claim. If you’re interested in the full list of qualifying expenditures you can read about it on our other blog.
- Eligibility for R&D tax credits requires a minimum spend – false
Another misconception is that many businesses mistakenly think there is a minimum R&D spend to qualify for R&D tax credits. The reason for this is because, prior to April 2012, this was the case. It used to be that companies had to spend at least £10,000 on an R&D project in order to claim tax credits for it. Nowadays there is no minimum.
This is great for SMEs and smaller businesses, who are able to claim R&D tax credits on even the smallest qualifying costs.
- Only profitable companies can claim – false
This is a misconception commonly held by startups, who are rarely profitable in their early years. As such, they don’t apply for R&D tax credits when they are conducting qualifying R&D work. The reality is R&D tax credits are claimable by loss-making companies! The amount loss-making companies can claim depends on the scheme they are applying under.
Read more about all the types of companies that can qualify for R&D tax credits here.
In fact, loss-making SMEs are arguably able to claim more through R&D tax credits than profitable ones. This is because they have the option of surrendering their losses. If this gets done, the company receives a cash credit of £145 for every £1000 of loss surrendered (14.5%). This mechanism helps them achieve savings close to the maximum of 33%.
- Businesses can only claim for successful projects – false
Regardless of if a project fails or gets abandoned, R&D tax credit can still get claimed for it. From the point of view of the business, it’s easy to see how a failed project can get discarded and moved on from. However, as long as R&D work has been provably undertaken, your client can include failed projects in their R&D tax credit application.
If anything, it’s easier to prove R&D has taken place within failed projects. This is because R&D comes hand in hand with trial and error. It also comes back to HMRCs definition of what qualifies as R&D, as overcoming uncertainty should be difficult.
Your client should also be aware this means they can claim for a project that is still in progress.
- Receiving grants means my client cannot apply – false
Receiving financial aid in the form of grants or subsidies will not compromise an R&D tax credit claim. However, there are a few conditions to look out for with this, mainly the grant must not have contributed towards the R&D work in any way. If it does, the SME scheme will disallow an R&D tax credit claim. Claiming through the RDEC scheme is still an option for your client though.
Also, under the SME scheme businesses get allotted one form of ‘state aid’ per year. Some grants may therefore not allow for R&D tax credits to get claimed alongside them.
Read about how government COVID-19 funding will impact R&D tax credit claims here.
- Businesses can only claim for their current financial year – false
It is true that HMRC does place a time limit on R&D tax credit claims. However, this limit is from two years after the end of your client’s current financial year. This allows established companies that are only just joining the scheme to claim for older R&D work. In this way, they don’t miss out on claimable work.
Let’s say your client’s most current financial year ends on the 31st of March 2022. They have until this date to claim for any work undertaken between 31st March 2019 and 31st March 2020. After this deadline, any R&D work they did in the financial year 2019-20 will be unclaimable. Of course, they are able to claim for R&D work undertaken between after 31st March and now.
- Similar innovation developed by a competitor prevents my client from claiming R&D tax credits – false
Your client can still claim for the advancement if its related intellectual property is not in the public domain. This is often the case, as competitors rarely make their technical developments available to the public until they get finished. However, your client should have no choice but to develop the technology in question.
While the end goals of the projects may be the same, the methods and techniques employed should be different. Don’t worry though as this is usually the case.
- Reworking existing IT packages qualifies as R&D – false
Systems already available in your client’s field, no matter how much they alter them, cannot qualify as R&D. The key with R&D is finding a new purpose for systems/processes or developing wholly original ones. In other words, the R&D has to be breaking new ground.
Commonly missed claims
As mentioned earlier, R&D tax credits are claimable regardless of the company or the sector they operate in. Nowadays the scope of work that qualifies as R&D means more activities are claimable under R&D tax credit schemes than ever. What is more, this list of qualifying work is always expanding. However, companies are still dismissing their work out of hand. This is because they are of the mindset that certain work is not R&D.
The reality is that HMRC wants to make R&D tax credits as accessible to innovative businesses as possible. We’ll dive deeper into their plans by summarising the most recent meeting of the RDCC in a later blog.
The following activities are ones that are not commonly identifiable as qualifying for R&D tax credits. They are definitely eligible, however, so it’s important to be aware of them if you want to maximise your client’s R&D tax credit claim.
Architectural work deals with problem-solving and making design improvements on a daily basis. As such, many Architects don’t consider these aspects of their work to be anything special. They often aren’t aware they could be eligible for R&D tax credits. As a matter of fact, if your client is an Architect it is likely large portions of their projects will qualify for R&D. This can take the form of engineering, software tools, external drivers or safety regulations.
- Food production
Industries in this sector offer a vast amount of opportunities to complete R&D activities. The mistake people usually make is setting the bar for R&D too high. The innovation does not have to result in mass food production for example. Projects can qualify as R&D through something as simple as developing a healthier recipe. Furthermore, qualifying businesses in this sector can be as small as a local restaurant.
In a similar way to Architecture, innovation and problem solving are inherent to Engineering work. The creation of new prototypes and designs is a surefire way to qualify for R&D tax credits. As discussed in the ‘misconceptions’ section, these prototypes don’t have to prove successful. Just so long as your client’s project goal falls in line with HMRC’s definition of R&D. Engineering work can also qualify if it streamlines a process, uses new materials or gets implemented in a challenging environment.
Read more about the types of projects that qualify as R&D here.
One final misconception – my client is better off claiming without expert guidance
Every business has to approach an R&D tax credit claim in a different way. There is nuance at multiple stages in the application process and the potential for errors is high. Research, information gathering, calculations and writing all have the potential to be time-consuming areas. Your client might have a focus on saving money by trying to apply for R&D tax credits all on their own. This is inadvisable. By utilising the tools of online tax credit portal software, as well as enlisting expert guidance, your client will maximise their claim. It will also remove any risk of an unsuccessful application, followed by an HMRC investigation.
made.simplr offers you access to cutting-edge software in R&D tax credit claims management. Our system is reliable, intuitive and fast, allowing for quick data inputting through Xero integration. If you come on board with us we’ll guarantee to save you and your client time and ensure accuracy in your claim.
Many of the myths and misconceptions discussed in this piece are overcome through intimate knowledge of the R&D tax credit claim application process. At made.simplr, our team of experts is on hand to help answer any questions you or your client may have.
Book a demo today!
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