Top 5 R&D tax credit myths for first-time claimers
Stock image - Unsplash / Mathieu Stern
Many businesses 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.
Whilst there is an awareness of the scheme, some common misconceptions stop businesses from claiming R&D tax credits. If you’re one of those companies scratching your head over your eligibility, have a read of our article as we demystify the five most common R&D tax credit myths.
If you’re entirely new to the R&D tax credit scheme, we recommend reading our Introduction to 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 claim for 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 understands 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 R&D that leads to a successful product launch or process improvement. That’s not the case at all. Even if the whole R&D project is 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 scientific foundation. We’ve submitted claims for jewellers, ice-cream makers, and retail chains.
While most claims come from high-tech industries such as IT or pharmaceuticals, a surprising number of claims come from less research-intensive sectors. 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 worked on your project and that they faced a scientific or technological challenge. Through our experience of processing 1000s of R&D claims, we’ve managed to identify four key professions – developers, engineers, scientists, and skilled artisans as integral to R&D. If you’ve used at least one in your project, you likely qualify for R&D tax credits.
You need to reach a minimum R&D spend to be eligible
We hear this myth often, and it tends to be because there was a minimum spend when the scheme first launched in 2000. Before 2012, the smallest amount of R&D expenditure you could claim against was £10,000. However, George Osbourne removed this in his 2012 budget.
More recently, there has been an additional 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.
However, the reality is that this affects only a tiny minority of companies with high rates of subcontractor work or small companies set up solely for R&D work. The aim is to minimise the number of fraudulent claims.
You can only claim when you submit your accounts for the year
First-time claimants are often unaware of this when they can make a claim. Whilst you do need to submit your R&D tax credit claim after you’ve closed your accounts for the year, you can also claim for previous financial periods.
In total, you can claim for an accounting period that 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 July 2021, and you have a year-end of July 31st, you will be able to claim all the R&D expenditure dating back to your financial period from August 1st, 2018 – July 31st, 2019.
For this reason, it’s a good idea to ensure that you’re claiming for all your historic costs when you first claim from the scheme.
We hope that provides some helpful 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 can provide the highest quality of advice on the scheme for a fraction of the cost of traditional advisors and accountants.
Get in touch with one of EmpowerRD's team members to find out if your business could be eligible for the R&D tax credit.