Why Do Some Applications For R&D Tax Relief Fail?
Although the scope for claiming R&D Tax Credits is incredibly broad, it still can’t be taken for granted that every application a company makes will be successful. The criteria is still very specific and the application itself contains a number of essential documentation requirements.
What are R&D Tax Credits and who can apply?
Research and Development (R&D) Tax Credit is designed to support companies that are working on particular innovative, scientific or technological advances. This could be anything from designing a new product, service or process to enhancing one that already exists. It can even be claimed on activities which were unsuccessful and to help companies which are loss-making.
Essentially, in order to qualify for R&D Tax Credits, the work must mean advancement in the overall field, not just for your own company. This means that an existing technology being used for the first time in your industry doesn’t count towards the relief.
The relief is received either as a reduction in a company’s Corporation Tax or as a lump sum.
Projects that count as R&D
Work undertaken must be part of a specific project to make an advancement in science or technology. It cannot be in a theoretical field, for example pure maths, or a social science like economics.
The project must also be in relation to your company’s trade – either one that will be started once the R&D activities are complete, or one which currently exists.
To receive R&D Tax Credits, you must be able to explain to HMRC how the work:
- Looked to overcome a particular uncertainty (either technological or scientific)
- Aimed to make a specific scientific or technological advancement
- Recognised uncertainty and tried to overcome it
- Could not easily have been achieved by a professional in the field
There are two branches to the scheme, one for small and medium sized enterprises (called the SME scheme) and one for larger organisations (the RDEC scheme).
Which R&D Tax Credit scheme should my company use?
Small and medium sized enterprises (SMEs) should apply for their R&D relief using the SME programme, as long as:
- They have no more than 500 staff
- They have a turnover of under 100 million euros or a balance sheet total under 86 million euros
You may need to include groups, partnerships and linked companies when working out if you’re an SME.
SME R&D Tax Credits will allow your company to:
- Deduct an additional 130% of their eligible costs from their annual profit, plus the normal 100% deduction. This makes a total 230% deduction
- Receive a tax credit worth up to 14.5% of the surrenderable loss if your company is not turning a profit
Larger companies should make their application under the Research and Development Expenditure Credit (RDEC) scheme. However, this scheme can also be used by SMEs and larger companies who’ve been subcontracted to do R&D works by another larger company.
Tax Credits under the RDEC scheme allow 12% of a company’s eligible R&D expenditure, which is notably less generous than the SME scheme.
So what kinds of things might mean a company is likely to be refused R&D Tax Credits?
There are several common reasons why companies can be turned down for R&D tax relief. This is by no means an exhaustive list, but here we look at a few we’ve come across.
The wrong accounting treatment is used
You’re only allowed to make an R&D Tax Credit claim for eligible costs that are revenue expenses. This means the R&D money must have been spent during the period - not capitalised. Costs with regard to Tangible Assets also cannot be considered for R&D tax relief.
Previous grant funding
A company that has received state aided grant funding is not automatically excluded for R&D Tax Credits but it may mean they’ll need to apply under the less generous RDEC scheme. This is regardless of the company’s size, assets and turnover. The RDEC scheme does not permit subcontractor costs if that subcontractors is a company (which they generally are), which can be a disadvantage. Companies that rely heavily on subcontractors will therefore need to carefully consider the pros and cons of grant funding in terms of the R&D Tax Credits they may be able to claim further down the line.
Low salary or volunteer staff
Whilst it might make perfect commercial sense to not to draw a salary during the very early stages of R&D, it will serve to reduce the amount of the claim overall. Dividends also do not qualify, so it could well be worth taking a salary instead depending on your circumstances. This will become an even more important factor in April 2020 when HMRC introduces the PAYE cap for companies which are making a loss.
Subcontractor invoice issues
A less frequent but still important issue is where there are subcontractor services which haven’t been invoiced in order that they are recognised as a cost. Instead, usually an offer of an alternative charge has taken place, such a royalty or a reduction in future work prices. Although this might be a good commercial decision, it does mean that the subcontractor’s time cannot be reflected in any application for R&D Tax Credits.
Companies which aren’t incorporated
R&D tax relief is only available for companies that are UK based and pay Corporation Tax. This means that partnerships or sole traders may wish to look at incorporating in order to benefit, otherwise they are not able to apply. Again, there may be valid commercial reasoning in not becoming incorporated but these need to be carefully considered.
Similarly, sometimes individual costs have been incurred even though there is a company behind them. Make sure your company’s accounting entries are correct so that everything has gone through your books accurately. Note also that claims can still be made for companies which are not yet trading.
Get in touch with the R&D tax relief experts
Think your company might be eligible for R&D Tax Credits but not sure where to start? Perhaps you’ve already began an application but need further advice? If so, our expert team would be pleased to help.
Myriad Associates, the name behind Tax Cloud UK, has many years’ experience dealing only in R&D tax relief claims – and we know where all the pitfalls lie. We’ve also developed our handy Tax Cloud calculator for businesses and accountants, to help you work out exactly what you can claim.
Plus, Tax Cloud supports a range of communication channels, allowing you to get expert advice at a far reduced cost compared to that of a full-service consultancy.
Whatever your query, call us today on 0207 118 6045 or send us a message and we’ll get back to you.
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