R&D tax credit myths to look out for

R&D tax credits are often overlooked because organisations don’t fully understand what they are and wrongly assume they are not eligible to make a claim. In this article, we seek to dispel nine common myths that exist around R&D tax credits so you can make an informed decision and avoid missing out.

Myth #1: You can’t claim R&D tax credits if you don’t have an R&D department

It’s true that most R&D tax claims come from organisations that are more likely to have an R&D department. But R&D isn’t confined to a laboratory – it happens in every industry. From transport to accommodation, the arts, healthcare and engineering, R&D tax credits can be applied to every sector. According to HMRC:

R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.

So as long as you are seeking an advance in science or technology, either by creating something new or building on something that already exists, you could be eligible to claim.

To benefit from the tax incentives, R&D does not have to be your core business purpose. However, you must be a limited company in the UK that is subject to Corporation Tax and have spent money on qualifying R&D activities.

Myth #2: Your business is too small to make an R&D tax claim

HMRC offers two forms of R&D tax relief to support businesses of all sizes. Depending on which incentive you qualify for, you can claim between £0.11-£0.33 for every £1 invested in qualifying R&D expenditure:

• SME: for companies with fewer than 500 employees, and not more than €100 million turnover or €86 million of gross assets. The SME incentive offers the most generous benefit.
• RDEC: for companies that do not meet the criteria for the SME incentive – although there are exceptions where SMEs can apply (if in doubt, speak to an R&D specialist).

Myth #3: You can only make an R&D tax claim on successful projects

R&D tax credits are designed to encourage organisations to invest in innovation, which is why HMRC does not penalise you for unsuccessful projects. Even if you had to abort the project part way through or it did not achieve the results you hoped, you can still make an R&D tax claim for the work you completed.

Myth #4: You can only claim R&D tax credits on the current financial year

If you are claiming R&D tax credits for the first time, you are allowed to recoup expenditure for your last two accounting periods. For example, if you apply for R&D tax credits during your accounting period ending in April 2023, you can also claim for R&D expenditure that took place between April 2020-2021 and April 2021-2022. This aligns with the 24-month deadline for amending your Corporation Tax return. Once the two-year deadline line has passed, you lose the ability to claim.

Eligible R&D tax claim expenditure can include:

• Direct R&D staff costs
• Externally provided R&D staff
• Subcontracted R&D
• Software used directly in R&D
• Prototypes
• Clinical trial volunteers
• Consumable items (e.g. water, fuel, power)
• Collaborative working
• Contributions to independent research

Myth #5: You aren’t eligible for R&D tax credits if your company makes a loss

If you’re a loss-making company that qualifies for R&D relief, you are still eligible to claim. HMRC recognises that organisations need to invest in R&D to create new products or services before they see a return on their investment, so much so that loss-making companies (both big and small) are typically granted the highest rate of relief. The big difference, in addition to the amount of relief, is the way your tax credit is paid. You can either receive the benefit as cash credit, carry back the loss to a year you were previously profitable, or offset the credit against any future tax liabilities. An R&D tax adviser is the best person to give you a steer on which method (or mix of methods) would best benefit your business.

Read more about R&D tax credits for loss-making companies.

Myth #6: To be eligible for R&D tax credits you must reach a minimum spend

When R&D tax credits were originally introduced in 2000, the guidelines stipulated a minimum spend of £25,000. Although this was removed for SMEs in 2003, a minimum spend on eligible R&D for large organisations was set at £10,000 and remained in place until 2012. Today, there is no minimum spend before you can make an R&D tax claim.

We’ve been contacted by many organisations over the years who believe their R&D tax claim was so small that it wasn’t worth claiming. But over 70% of the R&D tax claims we review can be improved – that’s why it pays to speak to an R&D specialist.

Myth #7: You can’t claim R&D tax credits if you subcontracted the work

Under the R&D tax credit guidance  you are allowed to claim:

• Up to 65% of relevant payments are made to external agencies
• Subcontractor costs that are incurred by a charity, higher education institute, scientific research organisation, health service body, or an individual or partnership of individuals

Therefore, it doesn’t matter if the R&D took place in-house, or was performed through a third party, like an agency, contractor or freelancer. If the activity is eligible for R&D tax credits, you should put in a claim.

Myth #8: R&D tax credits only apply to new products or services

HMRC states:

Your project may research or develop a new process, product or service OR IMPROVE on an existing one.

To ensure your R&D tax claim is a success, be sure to explain how your project:

• Looked for an advance in science and technology
• Had to overcome uncertainty
• Tried to overcome this uncertainty
• Could not be easily worked out by a professional in the field

As long as you are adding to new knowledge within the field you are operating, including building on what already exists, it’s likely your work can qualify.

Myth #9: Claiming R&D tax credits is complicated

The R&D tax claim process itself is not complicated as it is done through your Corporation Tax return form. However, where in-house teams and external accountants struggle is in understanding the nuances of what can/cannot be classed as R&D expenditure. This means you risk missing out on qualifying projects and not getting the maximum benefit you are entitled to or lacking technical accuracy which puts your claim at risk of an enquiry from HMRC. R&D tax credits are a specialist area, which is why if you’re going to put in a claim, you should consult an R&D specialist .