Fact or fiction?
Unlocking the truth behind R&D tax relief
In our years of experience, we have seen a number of persistent myths about the practicalities of claiming this valuable tax relief. These myths either present the process as being onerous and difficult, which discourages many businesses from making a claim, or oversimplify what is needed to the point that companies make incorrect claims and risk exposure to repayments and penalties.
The reality is that this relief is far more widely applicable than many believe, can be secured efficiently with the right guidance and continues to be hugely valuable to UK businesses who invest in innovation.
Explore each stage of the claim lifecycle.
Can I claim R&D tax relief?
- R&D tax relief is just for really big companies
- The R&D tax relief is available to companies of all sizes and can be more beneficial to small and medium sized businesses. There is no de minimis on the size of a claim.
- Relief is only for those doing blue sky research
- The R&D definition is far broader than many people think and encompasses most complex development work, including software development, particularly where there is experimentation, prototyping and testing. Related indirect activities such as project management can also be included.
- You can't claim if you use existing technologies
- Work done using existing technologies that involves overcoming constraints, applying them in a different way, or a way where the solution is not clear, can also be eligible.
- You can't claim if you solve problems for customers and don't own any IP
- IP ownership is not a requirement. Costs are excluded from the more generous regime for small and medium sized businesses if the work is being performed under a contract or is subsidised by grants, but a claim is still possible, with potential for a cash credit, under the R&D Expenditure Credit regime
- If you make losses, you can't benefit from the relief
- Companies of all sizes can now claim their R&D benefit as a cash credit where they are loss making, but the wider tax implications need to be considered, such as interaction with losses brought forward or surrendered by other group companies.
- If you employ less than 500 people, you can definitely claim under the more generous regime for small and medium sized businesses
- While employee numbers, turnover and assets are the key criteria for SME classification, the test is based on an EU recommendation and can be complex where there are investors with a shareholding of more than 25%. Each case needs to be reviewed on its own merits.
How much can I claim?
- Trying to work out what can be claimed as R&D takes too long and distracts the technical team
- Input from the technical team is essential, but the impact can be managed by ensuring the technical team understands the aspects of their work that are more likely to be eligible and the characteristics that support eligibility, concentrating on those areas.
- You can determine how much of the development work is R&D without bothering the technical team
- A claim prepared without the input of the technical team is unlikely to be robust. If subjected to enquiry by HMRC, the claim could be reduced or even disallowed, resulting in a repayment and potential for penalties.
- You can't work out how much to claim if you don't keep time sheets or detailed records
- It is possible to prepare a claim by making reasonable subjective assessments of how much time is spent by each individual, or how much of each project is likely to meet the R&D criteria. HMRC recognises that not everyone has detailed records, and will accept the results from a robust assessment approach.
- The amount you can claim is not worth the effort if the team doing the core R&D work is only a small proportion of your workforce
- The definition of R&D is based on the principle of 'technological uncertainty'. Overcoming that technological uncertainty is likely to involve people beyond the core R&D team, so it is important to consider other areas such as testing, project management, upscaling or professional services.
- You should be able to claim everyone's time once you've confirmed that you do R&D
- Care is needed not to overestimate the proportion of time spent on R&D. Many people will spend some time on other activities that do not relate to eligible R&D. It is also important to consider the stage of the development cycle you are in.
- You can't claim costs of the work done by contractors
- The relief is not limited to employees. Claims can include amounts paid to contractors who work under the supervision, direction or control of your company. These costs will need to be reduced to reflect the amount of time spent on eligible R&D and, if provided externally, reduced further by a statutory 35%.
How do I get the benefit?
- Claiming is easy - it's just a number on a tax return
- The claim itself is made by including the appropriate figure in a tax return, but it is advisable to provide additional information to help HMRC understand the context of the claim. Demonstrating a robust approach and that you have taken into account the legislation and guidance available, makes it less likely that HMRC will need to raise questions.
- HMRC expects a huge amount of documentation to be submitted
- Some documentation is recommended, but it should be commensurate with the value of the claim. This may range from a short summary of the approach adopted, and one or two write-ups of example projects for a fairly modest claim, to a structured report if the business is more complex with different business lines, multiple projects and a complex costing system.
- HMRC is very resistant to claims and can make your life difficult
- HMRC is keen to ensure companies claim what they are entitled to, but is vigilant for spurious claims. The more you can do to help HMRC understand your claim, either through documentation or up-front dialogue, the smoother the agreement process will be.
- Once you've made a claim, you'll hear nothing for months
- HMRC's benchmark is to either process the repayment/credit, or raise any questions within 28 days of receipt of an R&D claim, so it is perfectly reasonable to follow up with them after that time has passed.
- Tax inspectors do not understand R&D so cannot make a sensible judgement
- Tax inspectors are not experts in all fields of technology, but they have a great deal of experience in reviewing and discussing R&D claims. By providing support that demonstrates the complexity of the work undertaken, without confusing them with acronyms and other technical terms, you can help HMRC understand why your activities are eligible.
- Very few claims get queried, so once you've received your credit, that's it
- Even if you have received a repayment or a credit, HMRC is perfectly entitled to revisit the claim at a later stage and open an enquiry. If they do seek to disallow all or part of a claim, they are perfectly entitled to ask for early repayment of the credit and can also charge up to the same amount again as a penalty so it is important to ensure that your claims are robust.