When Might A Business Not Be Eligible For R&D Tax Credits

1st Nov 2019
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The research and development (R&D) Tax Credits scheme is a very important consideration for innovative companies as it can result in a huge amount of money in their pockets. Many successful applicants have reaped significant financial gain, either as a reduction in their Corporation Tax bill or a cash lump sum.

Sometimes however, R&D Tax Credits cannot - or should not - be claimed. Here we take a look at such cases and consider how R&D Tax Credits may not always be the answer.

When might R&D Tax Credits not be the best move?

Although it’s a very popular and lucrative scheme by enlarge, there are a few scenarios when R&D Tax Credits may not be the best way forward. These include:

1. The company has previously applied for a state-funded grant

If your client is an SME that has received grant funding for any R&D projects, or to help with some of its R&D costs, this will mean a reduction in the R&D Tax Credit amount. Furthermore, if they have used third party subcontractors on the R&D work, then the entire expenditure figure will be disqualified from R&D Tax Credits completely. However, the good news is that some relief can still be clawed back by using the RDEC scheme (although admittedly it is less generous).

Due to the fact that grants are applied for in advance, and R&D tax relief is claimed retrospectively, they often are not taken into consideration together. This could then rule out an R&D Tax Credit claim in the future, as companies cannot give back a grant in order to access R&D tax relief later on.

2. Your client’s business is in the creative industries

If your client’s company produces films, video games, theatre shows or high-end TV, it’s well worth them exploring some of the other reliefs HMRC has put together specifically for the creative industry. Even if their R&D project would be eligible for R&D Tax Credits, the creative reliefs HMRC offer can mean industry-specific tax advantages that might well be more appropriate. Sometimes a combination of R&D Tax Credits plus, say, VGTR (Video Games Tax Relief) might be the best way forward; but both cannot be claimed on the same expenditure. Again we can advise you on this to help your client plan their route forward effectively.

If one or more of your clients has recently undergone any innovative projects they may not even be aware that R&D Tax Credits exist, so it’s worth you flagging it up with them. If such activities are discovered, it’s then recommended you work with an R&D Tax Credit specialists such as ourselves, before the application process begins. After all, it’s not an easy one and there are many pitfalls that could prove incredibly costly.

When will my client’s innovation project not actually qualify for R&D Tax Credits at all?

Even some of the most innovative R&D activities still are not eligible for R&D Tax Credits. These include:

When the organisational structure isn’t right: The R&D Tax Credits scheme is only open to UK companies that are liable for Corporation Tax. This means charities, academic institutions and partnerships are all excluded from making a claim.

The social sciences: These are things like surveys on attitudes regarding a product or service, or psychological studies. However, such work can often go on to inform other activities that would be eligible for the relief, like a project to create a new computer programme to streamline a specific process.

Marketing: Marketing campaigns, whether successful or not, cannot make up part of an R&D Tax Credit claim. However, some of the technological projects that underpinned them may do.

Business processes: Improvements to the way your client’s company is run solely with regard to cost management or people are likely to not quality either. It’s all about technological or scientific innovation only.

What else may prohibit an R&D Tax Credit claim?

The R&D work was carried out over three years ago: This is why planning is so important and where support from Myriad Associates can be a lifeline. R&D Tax Credits can only be claimed for work carried out over the last two accounting periods (so just under three years at the latest). Any longer than that and a claim cannot be raised, meaning companies can be very heavily out of pocket.

The company has not paid any significant salary amounts: This generally applies to directors who choose to work hard on product development but don’t draw any money out from the company. Alternatively, they may simply be taking just a token salary and dividends. Classic R&D work may well have been undertaken, but without significant eligible costs (i.e. salaries) there can be no decent claim for R&D tax relief.

What about R&D Tax Credits and group structures?

Where it can be trickier is when you add group structures into the equation. For example, if company X within a group is working on R&D within mainland Europe, the money spent out will not qualify. Or if Company Y is responsible for the R&D work, but key staff are actually employed by Company Z, then again it’s easy to run into trouble if the costs aren’t attributed to the correct entity.

If your client has worked on innovation projects and is a member of a group, get in touch with us for advice on its organisational structure before taking anything further. Group structure can also have an impact on the amount of benefit a company will receive, as it could be treated as a large company without knowing it.

How Myriad Associates and the Tax Cloud portal works with you

We deal solely with R&D tax relief and absolutely nothing else. It’s what we do.

We’re not interested in poaching your client from you or taking over their accounting; instead we want to work alongside you to provide the most accurate, professional R&D tax relief advice possible for them. Our Tax Cloud portal also contains an area specifically for accountants, to help calculate entitlements and offer support, so you can get on with the day job.

To ask a question or find out more about working alongside us, please feel free to call 0207 118 6045 or use our contact page and we’ll get right back to you.