Blog: Lesser talked about R&D tax relief myths: busted
Think about who drives research and development tax relief claims in your organisation. Is it the finance team, or is it your technical team?
In truth, both parties have equal reason to be invested in claiming, and in getting that claim right.
In order to allocate capital, measure effectiveness, to identify risks, build technology or product roadmaps, manage cash flow, and for financial planning, FDs, FCs, Ops Ds – all leaders – should take the time to learn the fundamentals of the scheme, or find a trusted professional services provider who can give that view.
If you’re new to R&D tax relief or just need help sorting the hyperbole from the facts, we’ve busted some of the lesser talked about R&D myths below.Share it with your FD
1: You can’t claim R&D tax relief if you’ve had grant funding
Grants – whether considered state aid or not – do have an impact on claims, but it’s certainly not true that receiving funding automatically excludes you.
Ideally, you should seek advice before agreeing to funding because how it’s classified is important (notified state aid, de minimis aid, non-state-aid), but either way, some R&D projects can receive other government-backed funding and be eligible for tax relief. Most typically it’s the rate at which it’s received that changes (SME vs RDEC).
2: The HMRC crack down on fraud has made it harder to claim and you'll be investigated if you do
HMRC is not in the business of penalising compliant businesses or making it hard to receive relief. Claims can get rejected, but that’s usually due to HMRC needing further information; more in-depth investigations come about when claims look suspicious.
It’s also not true that anything has changed to make the process more difficult.
Some changes may be coming in from next year but these haven’t yet been confirmed, so if you’re already following best practices, and if your accounts and finances are up to date and compliant, there’s really nothing to worry about.
3: You have to have a profitable business to claim
Loss-making businesses can surrender R&D losses in exchange for payable cash credit or can carry them forward to offset future taxable profits.
You’ll often see the term ‘tax relief’ and ‘tax credit’ used alternatively; it’s a relief if you reduce your tax liability (which you only have if you’re profitable), whereas it’s a credit if you don’t have any Corporation Tax to relieve.
See some example calculations here to understand how it looks in practice.
4: You can’t claim if you’re a subsidiary of an international company
Busted: Usually incorrect.
Because company structures and relationships are complicated, we recommend you seek advice from a specialist on this, but generally, UK subsidiaries of overseas companies can still claim.
The size of the foreign company will be taken into consideration when deciding which scheme can be claimed through (SME or RDEC), and moving forwards where the R&D actually takes place will also play a role (from April 2023 the R&D must have taken place in the UK for it to qualify under new rules announced at the 2021 Autumn Budget).
You also need to take into account business structures when claiming for staff time spent on R&D; the amount that can be claimed differs dependent on whether staff are considered connected or unconnected subcontractors, externally provided workers or payrolled.
Find out more about contractors, connected subcontractors, and unconnected subcontractors here.
5: It isn’t worth the time or effort to claim
Busted: That one is up to you
Perhaps you don’t think you spend enough on R&D to make claiming worth your while, maybe innovation isn’t a big part of your growth strategy, or maybe it just seems too resource-intensive to claim right now.
Whatever has bought you to that conclusion is of course valid, however, the relief is there to reward businesses undertaking R&D so why wouldn’t you seek what you’re entitled to?
Whether you self-claim, do so through your accountant, or even with an advisor, it will take some time to pull together the information needed. But, the reward might be higher than you think when you consider staff costs, software, cloud computing and data sets, consumables, prototypes, and subcontractor costs can all be claimed against.
Those spending less than £50,000 on R&D tax relief may find it more cost-effective to self-claim through HMRC directly or via one of the many online tools available (read our tips for preparing to claim here and make next year easier) but if you really want someone to dig deep into your activity and take the load for you, seek help from an innovation advisor like MPA.
We offer no-obligation discovery calls to everyone, whether you’re already claiming or have no idea whether you can.Book yours here