- Research and Development
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Myths and Misconceptions about claiming R&D Tax Relief
At Innovation Tax, we regularly ask new clients for any specific reasons why they have not assessed their eligibility to make R&D Tax Relief claims prior to meeting with us, and around 60% respond by stating one (or more) common misconceptions.
I thought we could only claim if we were profitable and paying tax
The R&D Tax Credit scheme allows companies who are profitable (for tax purposes) to recover around 25% of qualifying expenditure in the form of a tax refund (or a saving against future liabilities) but provides an even greater benefit for those making losses, allowing them to recover up to 33% of their R&D investment as a cash payment.
If profitable, all qualifying expenditure is effectively ‘enhanced’ by 130% and the enhanced expenditure deducted against taxable profits, currently providing relief at 19%.
Where the company is loss-making for tax purposes, the same 130% enhancement is applied to any qualifying expenditure and added to the pre-claim losses. The adjusted loss can then be surrendered for cash at 14.5%, up to a maximum of 230% of the qualifying expenditure incurred.
I didn’t think R&D applied to me, as I have not invented any ground-breaking technology
R&D doesn’t just apply to ground-breaking projects. In fact, the definition is R&D is very broad and a range of activities qualify.
My accountant told me I didn’t qualify
The underlying nature of the R&D scheme is that it requires a technical assessment of a business, rather than focusing on the tax and financial elements. It’s therefore important to understand and assess the activities conducted by the business to see whether they meet the legislative requirements.
I claim other tax reliefs, so wasn’t aware that I could combine more than one tax relief to reduce my tax bill
The Government have outlined many initiatives to help support businesses and, in most cases, these can be claimed in conjunction, subject to the qualifying criteria being met.
I couldn’t understand how the definition of R&D applied to our business
This is a conclusion many companies arrive at after reading the HMRC definition which states ‘R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainties to activities which are not publicly available or readily deducible by another expert working in the field’.
For any businesses seeking to claim R&D Tax Relief, it is important to speak to a specialist R&D firm who will quickly establish if your business is entitled to make a claim.
I don’t have a lot of time to put in a claim or to fill out lots of forms
An R&D Tax Credit claim is neither a form-filling nor a box-ticking exercise. Depending upon the size of the business, a claim requires around 3 hours of your time, and is where a specialist firm can add significant value by handling the whole process from start to finish; this includes compilation of both the technical narrative and the financial analysis of all compliant expenditure to HMRC in support of your entitlement.
The uncertain nature of the scheme put us off from claiming
The R&D scheme has been designed to reward companies investing money, time and effort in innovative activities. Therefore, providing your company meets the legislative criteria on the projects being claimed and sufficient supporting documentation (including the technical narrative) has been submitted to HMRC outlining the basis of the claim, there is no uncertainty.
My principle activities are software development and I have been informed that HMRC are clamping down on software claims
HMRC are not so much ‘clamping down’ on software claims but have issued renewed guidance for companies claiming for software related activities to ensure an adequate level of technical information has been provided to explain why the latest activities comply with the legislation.
The new guidance on software claims involved updating outdated examples and providing clearer guidance on qualifying projects, focussing the claim on the advance in underlying technology as opposed to any commercial output.
Innovation Tax would be pleased to assist your business (or your clients) explore their eligibility to claim R&D Tax Relief. Please contact us on 0203 813 4600 or email firstname.lastname@example.org for further information and guidance.