Easy Mistakes That Accountancy Firms Make Regarding R&D Tax Credits

R&D Tax Credits form part of the UK government’s strategy in incentivising innovative companies. It works by offering generous tax reliefs to businesses investing in research and development (R&D), either as a reduction in Corporation Tax or as a lump sum payment.

Many companies wrongly believe that R&D Tax Credits are only available to large companies, or those solely engaged in areas like engineering and pharmaceuticals. This is a mistake; while such industries are indeed big claimers of R&D tax relief, the scheme is actually open to any business of any size in any sector.

Here we look at some of the common mistakes made when claiming R&D tax relief, and how you can help your clients avoid them.

1. Claiming for projects that aren’t eligible

During our two decades of experience, we’ve frequently seen claims which erroneously include non-qualifying projects. Usually this is simply due to a misunderstanding around what actually constitutes eligible R&D work. Unfortunately, sometimes it can also be because a client is “trying it on”, in the hope that HMRC won’t notice. This can often be the case when a company is making a software-related claim for example. It’s a very bad idea to do this however, as HMRC actually has its own IT team in-house specifically for checking out software/IT claims. Where it then finds any inaccuracies - whether by accident or otherwise - it will very likely trigger an HMRC enquiry into a company’s accounting practices. A massive headache will then ensue, not to mention hefty fines and/or further action. Don’t let your clients risk it! Make sure you work alongside an experienced R&D tax relief specialist such as ourselves at Myriad Associates.

2. Not being clear on which staffing costs can be claimed for

After an R&D tax relief claim has been successful a few times, companies tend to start recognising costs which directly apply. For example, engineers create specific parts, developers carry out software developments, lab technicians do experiments etc. But what many companies don’t realise is that there is also indirect eligible R&D which could involve other workers, like non-technical directors, finance staff and support staff. HMRC recognise this and understand that an R&D project requires a broad scope of disciplines and expertise, making many claimable.

Essentially, a key point to remember is that only those people who hold an employment contract with the company can be included under R&D staff costs. However, it may be possible to also claim under Externally Provided Workers rules, or as a sub-contract cost. As your client’s company accountant, when you come to us we will work this through with you so it’s clear.

3. Claims made for overheads which aren’t actually eligible consumables

Over the last few years, HMRC has increasingly tightened up the rules around this so it’s essential that companies are fully clued up. In a nutshell, businesses are allowed to claim for expenses in relation to items which are transformed or used up during the course of an R&D project.

The important point is in splitting out any consumable costs accurately. Again we will look at this with you in more detail when you work with us.

4. Companies wrongly claiming under the SME scheme

The SME branch of the R&D Tax Credits scheme is the most generous, but only certain sized companies can use it. Partnership and linked enterprises need to be included too, not just the individual business.

However, the snag is that companies that have worked on a sub-contract basis, or that have received state aid, must apply using RDEC regardless of size. We’ll come back to this shortly.

5. Struggles with RDEC

As mentioned, most R&D claims are submitted using the SME scheme, although the number of RDEC claims is also growing. There are some fundamental differences in the way the RDEC scheme is used to calculate a clients’ benefit amount which you need to be aware of. RDEC also doesn’t offer extra relief based on expenditure, instead providing a credit for use against Corporation Tax. It’s not an easy thing to calculate, even when using the latest software, and it’s easy to get in a muddle. Again, this is why we recommend working alongside R&D tax relief professionals such as ourselves.

6. Notified State Aid or other subsidies are not taken into consideration

If a company has been in receipt of any form of state financial assistance, such as a grant, then it automatically becomes ineligible to claim using the SME scheme regardless of its size. Certain other subsidies can also have an effect on how much a R&D tax relief a company will have available to it.

Any such state-backed financial help must be identified and addressed early on so that the right scheme can be used. Again we’re happy to assist with this.

7. Sub-contracted expenditure rules have not been applied

Although a company can include certain expenditure in relation to sub-contractors, not all costs will be eligible. Additionally, a reduced rate of relief will often need to be applied. When we help you compile your client’s claim, we will ascertain from the outset what costs are relevant and how they should be treated.

We can help with your client’s R&D tax relief claim

When it comes to R&D Tax Credits, a fresh eye over a claim can really help against a backdrop of reports, figures and paperwork. At Myriad Associates we deal only with the R&D aspect of your client’s work and will quickly discount anything that isn’t pertinent to their claim.

Average claim values for SMEs currently stand at £65k which no doubt your clients would be glad to receive. We will support you in supporting them from start to finish - so you can get on with everything else.

If you’re interested in how R&D Tax Credits can make a difference to your clients, call us on 020 3994 2236 or use our contact form. We’ll then get back to you at a time that suits.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Myriad are the creators of Tax Cloud, we help enterprises navigate, apply and secure tax incentives and grants. We specialise in R&D Tax Credits, Creative Tax Reliefs, Innovate UK grants, Horizon Europe grants, and R&D Capital Allowance Claims.

  • Submitting R&D tax claims since 2001
  • Strong track record spanning 20+ years delivering R&D tax credit claims
  • Over £70m claimed and counting
  • Industry leading specialists
  • We employ technical, costing and tax experts and tax experts
  • Confident of delivering value to our clients, we offer our R&D tax services on a success fee-only basis.

Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate