5 most common misconceptions about R&D Tax Credits

R&D only applies to developing new products or services.

New product or service developments are the most common forms of R&D we see claimed for, but they aren’t the only way to make a claim.

Firstly, R&D can also be applied to your internal processes. So if you’ve developed a new and more efficient way to produce your product or service, then you might be able to make a claim on that process improvement.

Secondly, your product development doesn’t need to result in a new product. You can also aim to improve an existing product, and that would also qualify as R&D.

As HMRC clearly states: “Your project may research or develop a new process, product or service or improve on an existing one.”

The R&D needs to have been successful to make a claim.

HMRC recognises that R&D does not always result in success. Indeed, if the outcome were a foregone conclusion it wouldn’t be R&D at all!

Businesses sometimes think that they can only claim for the R&D which leads to a successful product launch or process improvement. That’s not the case at all. Even if the whole R&D project was shelved with no usable outcome for the business, it would still count as R&D. In that case, HMRC would still allow you to claim for all the costs associated with the shelved project.

You need to reach a minimum R&D spend to be eligible.

We hear this misconception quite a lot. It’s likely caused by the minimum spend that was in-place when the scheme first launched. Prior to 2012, the smallest amount of R&D expenditure you could claim against was £10,000. However, that was removed in the 2012 budget.

More recently there has been another form of limit introduced into the scheme. The PAYE cap, which came into force in April 2021, limits the amount of credit you can claim from the scheme to 300% of your total PAYE/NIC liabilities. So this creates an effective maximum limit to claim values.

The reality however is that this affects only a small minority of companies with high rates of subcontractor work, or small companies set up solely for R&D work. Its aim was to minimise the amount of fraudulent claims.