Why eligible companies don’t claim R&D tax relief

Britain’s businesses are missing out on tens of billions of pounds of research and development tax relief. An analysis by tax consultant Catax in 2017 estimated that about £84 billion could have been claimed but hadn’t been.

The firm’s research showed that, of the 3.5 million British small to medium-sized enterprises (SMEs) actively trading, about 57% or 1.9 million are eligible for R&D relief but only a tiny fraction of these had actually made a claim. Nonetheless, since 2000 the government has paid out £27 billion pounds in research and development tax relief so it is worth companies that have not made a claim thinking again.

We have set out below the reasons why eligible companies don’t claim.

I don’t think I am eligible

Perhaps the chief reason companies don’t claim is that they simply don’t realise they can. Some people may have preconceptions about research and development, thinking it relates to certain industries or high-tech processes or larger firms or will lead to patented products and processes, or that they need a lab or a dedicated R&D department. However, this is not the case.

The Department for Business, Energy and Industrial Strategy published guidelines for the research and development expenditure credit incentive, which is aimed at larger companies. They state:

• R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology;
• the activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D; and
• certain qualifying indirect activities related to the project are also R&D.
  

These are broad definitions – intentionally so – the purpose of R&D tax credits is to encourage innovation, so managers should look at their companies with an open mind in assessing what they could claim for. The important phrase in the definition is ‘resolution of scientific or technological uncertainty’ so design changes or upgrades probably won’t be enough. However, making products more efficient or adding functionality if some sort of challenge had to be overcome are likely to qualify. And don’t be put off if some attempts at innovation don’t work. Research that does not have a successful outcome is likely still to be worth claiming for. Innovation is key here rather than success or profits.

Also software innovations are eligible – products don’t have to be tangible.  

My company is too small

There are two R&D tax credit schemes, RDEC and the SME scheme, so there is no requirement that a company be of a certain size to apply. What matters is how much you spend on innovation; your profits and turnover will not affect your eligibility.

We don’t make any money

If your company is making a loss you can take your tax credit as a cash payment. This applies even if you are not paying corporation tax (which is what RDEC and the SME scheme are linked to).

My accountant would have told me I am eligible

While some accountancy practices have R&D specialists many do not. Your accountant may not understand fully what your company is doing or realise that some of your activities are innovative. Expert knowledge beyond accountancy skills is needed to analyse your business to detect eligible activities. Inevitably accountancy firms will show different degrees of initiative in helping you to minimise your tax bill and claim all the allowances that you may be entitled to.

I have quite enough to do with HMRC already

The RDEC and SME schemes are potentially lucrative, and HMRC will support genuine, accurate claims. Once the initial work of putting together a claim is done, claims in subsequent years will be more straightforward. HMRC settles about three-quarters of claims within 28 days of their submission.

We are already getting grants for R&D

Companies engaged in research and development are able to claim R&D capital allowances (known as RDAs). These are the capital version of the RDEC and SME schemes. HMRC distinguishes the deployment of capital from expenditure, and claims can be made for both or either. A claim for one does not affect a claim for the other, though of course a claim in respect of the same sum cannot be made under both capital and expenditure schemes. Similarly a claim under the Patent Box scheme, which is tax relief available to UK companies that pay corporation tax on certain profits that derive from intellectual property, will not affect a tax credit claim for R&D expenditure.

I am too busy

Small business owners may find it extremely difficult to find time to set aside to examine if they should be making an R&D tax credit. This is where specialist help comes in. R&D tax experts will be able to tell you if you should be making a claim. In many or most cases the money generated by a claim is greatly in excess of the fees paid for professional help in assessing the business and submitting the claim.

I don’t generate enough profits

Smaller and newer business owners will often tend to pay themselves in dividends rather than salary, which can reduce the amount of eligible expenditure if it results in a reduction in the corporation tax bill. Again, professional help is needed to analyse if this is the most tax-efficient approach if you want to make an R&D tax credit claim.

The value of my claim would be too small for the effort involved

Business owners may not be aware of the wide range of costs that can be claimed for. You can claim for the cost of using your staff's time on an R&D project. This includes their salary and your national insurance and pension contributions. The claim should relate to the proportion of staff time spent on R&D. Materials used to make prototypes are claimable, as are relevant software licensing costs. Some staff expenses are also eligible as are subcontractor costs (although the criteria for the latter are very limited under the RDEC scheme).

If you think some or any of these assumptions apply to you then you are strongly advised to get in touch with an R&D tax credit specialist, who will be able to advise you further. R&D tax credits offer substantial rewards to eligible companies, and should be taken advantage of as much as possible.

‍