The R&D Tax Credit Scheme introduced by HMRC in 2000 is an excellent opportunity for innovative UK startups and SMEs to reclaim back some of their money spent on research and development (R&D).
But still as over the years the scheme has been updated, there are some common mistakes we’ve seen businesses make when submitting their claims.
To help demystify this process, we’ve put together the top five mistakes we’ve seen businesses make when submitting their R&D claims.
By doing so, we hope to make the R&D claim process even easier for businesses and help them make the most of the scheme by claiming back all eligible costs.
1) Misunderstanding the treatment of grant funding
While grant funding is another excellent avenue of funding for innovative businesses in the UK, founders need to be careful when looking to pursue both Grant Funding and R&D Tax Relief.
While there are ways in which the two can be used together this is only in certain circumstances. Read our blog Can R&D Tax Credits and Grant Funding work together? to find out more about this.
Startups cannot access more than one type of notified state aid for the same project (the R&D scheme falls under this category as do some major grants).
For example, if you were to apply for the Innovate UK Smart Grant, you won’t be able to submit an R&D claim under the SME portion of the scheme as they are both classed as notified state aid.
If the grant was classed as state aid, then you would need to understand what the grant was technically for, then either the whole project would be eligible under the RDEC portion of the scheme, or just a subcomponent project of the main project, or if the grant was sloppily applied for the whole claim may be precluded from the SME portion of the scheme.
2) Poorly written technical narratives
Since the R&D scheme is about encouraging innovation in UK businesses, the technical narrative part of your claim is arguably the most important.
💡 In the scheme’s guidelines, HMRC are explicitly clear on how they define ‘qualifying R&D’ and how each technical narrative must be written. Any deviation from them or confusion within the report can result in further questioning by HMRC, or even dismissal of your claim.
Alongside this is misunderstanding what technological activities actually qualify for the scheme, and making sure any that do not are not included in your narrative.
For example, routine technological & scientific work where no uncertainties existed or did not contribute to your R&D advances do not qualify and are unnecessary for the technical narrative.
3) Overclaiming employee time
💡 Again, you need to be careful when writing your narratives for your claims.
Similarly to the technical portion, adding hyperbolic or non-qualifying details into your report can get your claim flagged for an enquiry or dismissed completely.
One of these hyperbolic details in many claims tends to be the amount of time an employee spends on R&D. While it would be an admirable and impressive feat if one individual spent 100% of their time on R&D, it is nearly impossible and can signal to HMRC that there are other exaggerations in your claim as well.
4) Misunderstanding business ownership or claiming under the wrong scheme
In some cases, founders will file their R&D claim under the wrong scheme due to misunderstanding eligibility criteria.
💡For example, if there is a larger company not based in the UK that sets up a smaller subsidiary company in the UK, they might think they're eligible for the SME scheme, but you have to take the ownership of the company and the total group size into account when determining eligibility for either scheme.
To avoid confusion or HMRC dismissing your claim due to incorrect filing, make sure you read the eligibility criteria extremely carefully, or check with an R&D Specialist to see which scheme best fits your company.
5) Difference between commercial R&D and R&D that qualifies for UK Tax Credits
While the main goal behind the R&D Tax Credit schemes is to encourage innovation in UK businesses, there are some distinguishing factors on the type of research and development work that qualifies for the schemes.
To be eligible for the UK R&D Tax Credit Schemes, your business must be undertaking R&D activity that is aiming to resolve an existing scientific or technological uncertainty, whilst simultaneously seeking to achieve a scientific or technological advance.
Strictly speaking, the advances being made need to be made for the whole industry, not just the company.
While there is no perfect formula for submitting your R&D claim, there are efficient and effective ways to increase your chances of success.
The process can be overwhelming - particularly for busy founders - which is why we're here to help! Book an eligibility call with our team today to see which scheme best fits your business, so we can get started on your claim right away!