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It’s all too easy for entrepreneurs to get bogged down in the day-to-day of running a business.
Time is scarce – especially when it comes to revisiting potential financial tax incentives that could put cash back in your bank account.
Yet it can make good financial sense to check out R&D tax credits (again).
The UK Government introduced R&D Tax Credits to support SMEs back in 2000. Yet still we find many companies that are not aware that they qualify for this generous tax incentive.
If this is you, then you may be leaving £50,000 or more on the table year on year!
Got your attention? Good, then please read on to see if any of the following misconceptions sound similar?
Top 7 most common R&D Tax Credits misconceptions
1: “We are not innovative so we can’t qualify for R&D Tax Credits”
This one is really common. Terms such as “groundbreaking”; “leading edge”; “innovative”; “pioneering” etc are often used in reference to evidence of projects that qualify for R&D tax credits. Although it would do your case no harm for such references to apply (!), this does not necessarily need to be the case.
The R&D tax credit rules require there to be one or more projects that “seek an advance in science or technology”. And in so doing, the projects should aim to “overcome technical uncertainties”. If the technical uncertainties can be overcome by the application of “routine” or “commonly accepted knowledge” then this is not qualifying R&D for tax purposes. There should be an element of financial risk plus the ultimate arbiters of whether your project goes beyond known knowledge in your field is a “competent professional” (likely one of your employees).
So if you consider these qualifying criteria for R&D tax purposes, then you can see that some of the most – dare I say – “boring” and mundane projects could be qualifying.
So please don’t be put off by some of the whizzy, high profile R&D tax credit poster-boys that are touted as good examples of the R&D tax credit success stories. The application is, and is intended to be, very broad. And our experience is exactly this.
2: “We don’t have any R&D staff or an R&D department”
The name “Research and Development Tax Credits” (or R&D Tax Credits, for short) is a bit of a misnomer. In fact, HMRC would typically argue that the “research” bit does not qualify for the relief. The key part is “development”.
Now let’s revisit this tax relief with a more simplified name: Development tax credits.
Has your company ever tried to develop something new or improved something to meet your needs and requirements (perhaps because nothing else existed in the marketplace that solved your needs)? Did you incur costs (financial risk) trying to scratch your itch? Did you have to employ or subcontract work to highly skilled people in this field who, at the outset, were unsure whether your objectives could be achieved?
Can you see….already we have the bare-bones of a potentially qualifying project…? And it doesn’t matter that you don’t have a department with a sign that says “R&D Team” above it or an office with “R&D Manager” or “R&D Director” on the door.
Perhaps you are underestimating your team and company in this light; maybe you should get these signs up!
3: “We tried developing a new product or technology but it failed – so we can’t qualify”
Congratulations on seeking to take on the challenge of developing or improving technology to take it to the next level. It will have been disappointing that it didn’t work out. You may have suffered financially from this failed investment.
Enough of the bad news – the good news is that the R&D tax relief incentive is designed to support aborted or failed projects.
You do not need to have a successful project to qualify under the R&D tax rules.
In fact, failure on technical grounds e.g. it was too technically challenging. is often some of the best evidence of a qualifying R&D project!
4: “We invested in what sounds like a qualifying R&D project last year but we didn’t know about this and our accounts and tax return have now been filed – we must be too late”
The tax rules for the R&D tax incentive are designed to cater for situations like this – where a retrospective R&D tax credit claim may be necessary.
The good news is that a retrospective R&D tax credit claim can be made. The rules allow for claims to be made for tax accounting periods ending in the past two years. So if you have say a 31 Dec year end – at the time of writing (Sept 2016) – your accounting periods ended 31 Dec 2014 and 31 Dec 2015 are still within time for a retrospective R&D claim.
The retrospective claim is included in an amended corporation tax return (CT600) and filed online.
Detailed R&D tax calculations and a technical report that supports the qualifying nature of the project work should also be filed with HMRC.
5: “We are developing some new technology for our own use so this can’t qualify…”
Qualifying R&D projects are not restricted to market-facing projects. If you are investing in new technologies aimed at helping improve your business and trade then this could qualify.
Common examples might include some bespoke CRM software or say a proprietary booking system or perhaps some technology that might integrate legacy systems.
If market offerings do not meet your company’s unique specifications, resulting in you having to invest in developing bespoke systems, then this might qualify for enhanced R&D tax credit relief.
6: “We haven’t maintained time-sheets to track detailed time spent on R&D so we can’t make a tax credit claim”
Although detailed time-sheets can help, they are not a prerequisite for making a valid R&D tax claim. HMRC are fairly pragmatic in this respect. They understand that, especially for start-ups and busy entrepreneurs, maintaining detailed tracking records for the purposes of a R&D tax credit claim is unlikely to be front-of-mind!
It is sufficient for management to provide their best estimate of the time spent by team members on qualifying R&D work.
As things scale up, it is good practice to improve processes for tracking and recording qualifying time and costs. As well as pleasing HMRC, this should help ensure that you don’t under claim in the future!
7. “We are pre-revenue so have paid no company tax and very little if any PAYE – so we can’t claim R&D tax credits”
The UK Government understands the importance of startups and early stage entrepreneurial companies to the UK economy. It is at this stage that companies most need financial support, especially if they are taking on commercially risky and technically challenging work. They are tomorrow’s potential world beaters…
R&D tax credits are available to pay cash into the bank accounts of companies that may not have paid corporation tax or PAYE. So long as the underlying project work qualifies and the money has been spent on employees / subcontractors / externally provided workers / software / consumables.
Changes are proposed from April 2020 to introduce a PAYE cap on R&D tax credits so keep this in mind when planning for the future.
These are just seven common misconceptions related to the UK’s R&D tax credit relief incentive. We could list a bunch more!
Don’t leave it to chance. Speak to an R&D tax credit specialist today.