5 most common misconceptions about R&D Tax Credits

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Harinder Sandhu

Harinder Sandhu Founder & CEO

Many businesses will have heard of the R&D tax credit scheme. It’s a lucrative government tax incentive, which can credit your business up to 33% of your R&D costs.

While there is general awareness, we do still encounter some misconceptions which prevent businesses from claiming their rightful share of the scheme. This article aims to debunk some of those myths.

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.

Only scientists conduct R&D.

R&D happens in all industries, even those without a traditionally scientific basis. We’ve submitted claims for ice-cream makers, jewellers and retail chains.

While the majority of claims comes from high-tech industries such as IT or pharmaceuticals, a surprising number of claims come from less research intensive industries. For example, according to the most recent statistics from HMRC, £95million of claims originated from the Arts and Entertainment sector.

You will however, need to demonstrate that a competent professional in your field could not have easily devised a solution without conducting R&D, but that competent professional needn’t be a scientist. A competent professional could also be a skilled artisan, product designer, architect or indeed many other industry-specific professionals.

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.

You can only claim when you submit your accounts for the year.

First-time claimants are often unaware of when they can make a claim. You do need to submit your R&D tax credit claim after you’ve closed your accounts for the year, however you can also make a claim for previous financial periods.

In all, you can make a claim for an accounting period which ends up to 2 years before your R&D claim is submitted to HMRC. So for example, if you find out about the R&D tax credit scheme in March 2021, and you have a year end of March 31st, then you will be able to make a claim for all the R&D expenditure dating back to your financial period from April 1st 2018 – March 31st 2019.

For this reason, it’s a good idea to ensure that you’re claiming for all your historic costs when you first make a claim through the scheme.

We hope that provides some useful insight into what you might be owed from the R&D tax credit scheme. At EmpowerRD, we combine the expertise of ex-HMRC inspectors alongside an intelligent online claims platform. This way we’re able to provide the highest quality of advice on the scheme for a fraction of the cost of traditional advisors and accountants.

If you’re entirely new to the R&D tax credit scheme then we do have a handy guide ‘Introduction to R&D Tax Credits’ over on the EmpowerRD website.