4 Common Misconceptions about Claiming Research & Development Tax Relief
Companies often think they don’t qualify for Research & Development (R&D) tax relief. Here we shed some light on the top misconceptions businesses have around this highly underused tax relief.
Research & Development (R&D) activity is vital for the growth and balance of the UK’s economy. In 2019 alone, businesses across the country spent over £25.9bn on innovation. That’s an increase of £882m on the previous year. R&D tax relief is a way for these innovative companies to receive money back on their R&D expenditure. It is a government-backed scheme introduced in 2000, which aims to reward UK businesses that invest in the development of unique processes, materials, products or systems through advances in science or technology.
If you are a business investing in innovation, claiming R&D tax relief is more important than ever. During the COVID-19 pandemic this tax relief has not only been vital to the continued operation and growth of many businesses, but it will also be key to helping reignite the UK economy as lockdown comes to an end. However, there is a common misunderstanding that claiming R&D tax relief is solely reserved for people in white lab coats. In looking at the HMRC legislation, it is easy to understand why this is the perception; but, when broken down and applied in a practical sense, the depth and breadth of its application becomes apparent. Essentially, the legislation boils down to two questions:-
- What scientific or technological advance were you seeking to achieve for your industry?
- What challenges did you have to overcome to complete the project?
Although R&D tax relief significantly benefits both businesses and the wider UK economy, it is suggested that over half of the 8 in 10 SME companies that could be eligible for the scheme have not yet made a successful claim! So why aren’t businesses making the most of this great incentive? Let’s discover some of the common misconceptions.
- “I can’t claim R&D – my business isn’t in a profit.”
People often believe that they are not able to claim R&D tax credits because their company isn’t making a profit. However, this just isn’t the case. The scheme enables businesses not making a profit to use their losses to claim a cash tax credit- which can be beneficial for businesses looking for a much-needed cash injection – or a tax credit, helping them to recuperate up to 33.35% of their qualifying expenditure.
- “My accountant handles my finances, so they will be able to process my R&D tax relief claim.”
For many accountants, claiming R&D tax relief is not a task they regularly undertake because it is such a specialist area. Given most client portfolios include businesses from various sectors with no critical mass, it is difficult to build the industry-specific knowledge and expertise needed to stay abreast of technological and legislative developments. This can result in qualifying expenditure being undervalued or not recognised, negatively impacting the benefit amount. However, there is a solution. Many reputable specialist tax relief consultancies work directly in partnership with accountants for them to identify the optimal client benefit for their clients.
- “I have outsourced work to subcontractors to complete my R&D activity, therefore I can’t claim.”
Developments which have been made by outsourcing to subcontractors can be claimed under the R&D tax relief scheme, although this depends on the size of the business. SMEs carrying out activity will typically be able to claim 65% of the qualifying outsourced costs. This is designed to support smaller businesses that depend on collaborating with partners to deliver their innovative projects. However, claiming for subcontractors becomes more difficult for larger companies that come under the Research & Development Expenditure Credit (RDEC) scheme. It is only possible for them to claim costs if they were made to an individual, partnership of individuals or other specific bodies.
- “We will claim ourselves – the process seems pretty simple.”
It is possible for businesses to make their own R&D claims, but the process can be complex. On average, it is estimated that companies underestimate their R&D claim value by 50%. It is easy to miss qualifying expenditure due to lack of experience or incorrect calculations. Furthermore, if you submit a claim without an expert or the right knowledge, it is more likely that your claim could be rejected. In more extreme cases, this may result in a HMRC enquiry which can be stressful and expensive.
R&D tax relief is a way for innovative companies to receive money back on their R&D expenditure. It is a government-backed scheme introduced in 2000, which aims to reward UK businesses that invest in the development of unique processes, materials, products or systems through advances in science or technology. So many companies qualify, yet have no idea.
To uncover hidden value in yours or your business, contact us today on 01609 531740 or simply drop me an email to firstname.lastname@example.org.