It is 20 years since the launch of the R&D Tax Credits scheme, but there remains only a small percentage of the UK’s eligible businesses that have made a claim. Luvo Financial partner and co-founder Ian Batkin believes this is largely due to widespread low awareness of the scheme and misunderstanding of what qualifies for R&D Tax and how to make a claim. Here he sets about dispelling the ten most popular myths to put the record straight.
1. R&D Tax relief is all about employing scientists in white lab coats – we don’t have an R&D Department and don’t employ R&D staff or PhD’s, so can’t claim.
Eligible R&D goes way beyond that – it can be about science-based research and then development, but it’s actually open to every business, regardless of sector. Manufacturing, engineering, IT and the service sector (and others) who’ve sought to overcome uncertainties (issues / problems) in trying to develop new or improved products, processes, services or systems, are likely to qualify to claim. You don’t have to employ R&D staff (PhD’s or otherwise) and also don’t have to own the IPR from what you’ve done in order to be eligible to claim.
2. Claiming is risky. HMRC don’t want claims to succeed and claiming may lead to broader tax investigations.
Claiming isn’t at all risky if you properly understand the legislation, only claim for what you are legitimately able to claim for, and present the claim in the correct way. HMRC certainly don’t want or like frivolous claims (so don’t go down that route), but claiming R&D Tax Credits in the right way will most definitely not lead to broader tax investigations.
3. You can’t claim R&D Tax Credits’ for failed projects (or for where this technology only benefits us) – we tried developing a new product (or way of doing something) but it failed, so we can’t claim.
R&D Tax Credits’ is ‘activity based’, and not based upon success; you do not need to have a successful project i.e. to have succeeded with your R&D in order to claim; it’s about the journey, not the final destination, and failed projects often demonstrate difficulty and that R&D has actually taken place. Also, qualifying R&D projects are not restricted to being market-facing – if the work undertaken is focused internally e.g. ‘bespoking’ or integrating software and no readily available third-party offerings meet your unique needs, then this could well qualify for T&D tax relief.
4. We haven’t made a profit (or are pre-revenue), have no Corporation Tax to pay, so can’t claim.
Only Limited Companies can claim R&D Tax Credits, but if the work undertaken is qualifying R&D, then both profitable and loss-making companies are eligible to claim. This is often the case with start-ups and early-stage entrepreneurial companies, which the government certainly want to support and encourage. There is an opportunity to cash-in and take a payable cash credit, where appropriate and loss-making SME’s can claim between 14.5% and 33% of eligible R&D expenditure, whereas loss-making larger companies can claim about 10%. Changes are afoot though, whereby from April 2020 a new PAYE cap will be applied, which will restrict the amounts that can be claimed for companies with few employees.
5. Only large companies can claim R&D Tax Credits (or there’s a minimum spend to be eligible) – we are a small company, so can’t claim.
There is no minimum (nor maximum) amount that a company needs to have spent to claim R&D Tax Credits. In fact, there are separate (albeit similar) schemes for large companies (RDEC) and smaller companies (SME) making claims, although less than 10% of SME’s that could claim actually do so. This would appear to be a popular misconception and more small companies should investigate claiming.
6. We employed / engaged a third-party subcontractor to do the R&D work for us, so we aren’t therefore eligible to claim R&D Tax Credits ourselves.
This is one of the more complicated areas, so it’s best to seek advice on this scenario. SME’s that outsource some R&D to subcontractors are usually eligible to claim R&D Tax Credits, based upon 65% of the cost incurred, provided that an appropriate contractual relationship has been put in place. To a large extent it depends on who stands the technical and financial risk; large companies are unable to claim for any expenditure with subcontractors and SME’s who subcontract for someone else are forced to claim under the less-generous RDEC (Larger Company) scheme.
7. We received grant-funding for the R&D that we undertook, so can’t claim R&D Tax Credits.
This is another slightly more complicated area, which in essence very much depends on what the grant was for and who it came from. Certain grants will exclude a company from claiming under the SME scheme (which dictates that SMEs can’t receive more than one amount of ‘state aid’ in any one year), which will reduce the amount of relief that will be received but could still realise up to 10p in the £1 back by claiming under RDEC.
8. We worked on what now sounds like eligible R&D about 18 months ago; our Accounts and Tax Return has been filed for that year, so we’re too late i.e. we can’t now claim R&D Tax Credits.
It certainly makes good financial sense to claim R&D Tax Credits (and pay less Corporation Tax) as soon as you are able to; claimants are allowed to amend and resubmit CT600 Tax Returns within two years of a period end, and often do so when claiming R&D Tax Credits for the first time. So, by way of an example, if your year-end is 31st March, you are currently allowed to claim for APE’s 31/03/18 and 31/03/19 (but lose the ability to claim for the earliest of these years from 01/04/20).
9. We’re a small company and haven’t maintained detailed time sheets or records of expenditure on the R&D that we’ve undertaken previously, so can’t claim R&D Tax Credits.
If you have detailed time sheets and records of expenditure on R&D, that’s certainly no bad thing, but in all honesty, is quite unusual. HMRC ‘cut SME’s (in particular) some slack’ in this regard and understand that this won’t have been a priority previously, so accept that best estimates of time spent will be used when making the first few (two or three) claims. However, HMRC does expect claimants to improve their processes for tracking and recording time spent and costs incurred for subsequent claims, which also helps ensure that companies don’t over or under claim.
10. Making a claim is quick and easy – we’ll do this ourselves.
Or more correctly, I certainly wouldn’t try to do it on my own if I was you! We at Luvo are independent specialists in assessing eligibility and supporting successful R&D Tax Credits claims; we have a 100% claims success record and that is in no small part because R&D Tax is essentially all that we do. We are often accused of ‘dumbing this down’ and making it sound easier and more straightforward than it actually is, but are convinced that making a full and fair claim shouldn’t be onerous or time-consuming and most definitely should not result in an investigation by HMRC. We work on a contingent (no-win-no-fee) basis and our fee is an agreed / fair proportion of the tax saved or avoided – we very much believe that we can help Accountants and their clients make successful claims in a speedy, painless and straightforward way