7 reasons why you’re not claiming R&D tax relief – and why you could be wrong
As leading experts in R&D tax credits and relief, we’ve heard all kinds of misconceptions about the scheme over the years. The words ‘Research and Development’ can make you think of things like rocket ships, test tubes and people in white lab coats but that simply isn’t the case. Many of our clients don’t realise they have qualifying projects, but just view them as their normal ‘day to day activities.’ So, are often surprised when they learn their innovations are eligible for the government-backed scheme.
Since the scheme launched back in 2000, £26.9 billion in R&D tax relief has been claimed. However, many businesses are still not claiming or not maximising their full benefit, potentially because of not understanding the scheme and its criteria. We’ve listed seven of the top reasons we’ve come across as to why businesses aren’t claiming R&D, and why they could be wrong.
1. My company is too small to bother.
R&D (Research and Development) tax relief is a huge funding mechanism for innovative businesses of any size. There is even a scheme specifically designed for small and medium-size businesses to help innovation flourish at all levels of business.
You qualify for the SME scheme if you are carrying out innovative projects and:
- are limited company based in the UK
- employ less than 500 people
- have turnover which is less than £85 million a year
- have been trading for at least a year
If you fall outside of the above criteria, a claim can still be made under the Research and Development Expenditure Credit (RDEC) scheme that is designed to provide large companies an above the line credit.
It’s not really about the size of your company or its turnover – it’s the amount you spend on innovation that is key.
2. We don’t have an R&D department, a laboratory or anybody in a white coat.
Doesn’t matter – the definition of R&D is much wider than you might think. The key phrase refers to the “resolution of a scientific or technological uncertainty”.
So, you could be solving problems, developing software or creating innovative products, materials or processes. It could be that you’ve failed along the way, run into dead ends and had to change direction. Here any bugs, glitches and teething problems can be a good thing as they all show technological uncertainty.
But you are looking for “scientific and/or technical” innovation, rather than anything aesthetic or cosmetic. Bringing out a product in a new colour or flavour probably won’t qualify. But making it more efficient or adding improved functionality is much more likely to qualify as it is likely a challenge had to be overcome to achieve it – such as scale-up of artisan foods where creating the same product on mass may not be straightforward.
3. Our R&D spend is really low – it’s just not worth it.
That could be the case – but make sure you are considering all the expenditure associated with that activity or project. R&D costs can include:
- Staff costs
- Externally provided workers and sub-contractors
- Consumable Items
- Utility costs
- Capital expenditure
When you consider most claims made are below £50,000, the scheme is there to support companies of all sizes. Making sure you understand the guidelines enough to capture the qualifying expenditure is the art.
4. I’m making a loss so I’m not paying corporation tax anyway.
Many small companies believe they’re not eligible if they’re not making a profit and aren’t really interested in taking future ‘relief’. But you can take this relief as a cash payment now whether you’re in profit or loss.
So even if you’ve never paid corporation tax or have yet to make a profit, you can still get cash payments.
5. It can’t be relevant to me or my accountant would have mentioned it.
Not all accountants are familiar with the detail of the scheme, and even if they are they may not be able to identify innovation just by reviewing your company accounts. It takes someone with a working and practical experience of your industry to identify the R&D. Think about your accountant like you do a GP, great GPs see the problem and direct you to the specialists.
6. The less I have to do with HMRC the better.
Some businesses are understandably nervous. But rest assured this is a legitimate tax incentive and definitely NOT a tax avoidance scheme – the government wants to reward your innovation. HMRC and the treasury fully support the scheme and have continually affirmed the commitment to increasing funding for R&D – the Industrial strategy target is 2.4% of GDP.
It may be that you need to work with an R&D tax expert to identify all the expenditure that qualifies and present this in the right way for HMRC. But with the right claim, there is no reason why this should attract an HMRC enquiry. 75% of claims received by HMRC are settled within 28 working days.
7. Sounds like a lot of hard work.
Not necessarily – and once you know what you’re looking for you can make a claim year after year. It’s the scheme that keeps on giving.
If you would like to find out if you have a claim, get in touch with our specialist team today by calling 01727 738600 or getting in touch through our web form.
From the Knowledge hub
There’s a way to do it better – find it.