R&D Tax Credits: Pitfalls to look out for

Updated: Feb 1

Since its introduction 20 years ago, the research and development (R&D) tax credits scheme has been hugely successful in incentivising innovation in the UK.


By mitigating financial risk for founders carrying out viable research & development, the UK government has enabled businesses of all sizes to take the plunge when it comes to crafting cutting-edge products and services.


The use of R&D Tax Credits is on an upward trajectory. In 2020, HMRC reported a 19% increase in total financial support claimed through the scheme, reaching £7.4 billion.


However, a surprising amount of businesses still don’t take advantage of R&D Tax relief.

In fact, most eligible companies are either unaware of the program, or have an inaccurate picture of the way that it works and how they can claim R&D Tax Credits.


Claim Capital is on a mission to eradicate misconceptions about R&D Tax Credits and spread the word about the unique advantages they offer the UK.


To do this, we’re going to run you through the common obstacles that founders run into when claiming R&D Tax Credits. By checking through this list, you’ll know how to gain maximum benefit from the scheme, year after year.



1. You aren’t sure if your eligible to claim R&D Tax Credits. 💡


The first pitfall within R&D Tax Credits is whether companies are aware of their eligibility.

To approach this, let’s first define what research and development actually is.


By definition, research and development (R&D) refers to activities that companies undertake to innovate and introduce new products and services or to improve their existing offerings.

So, if you’re in the process of bringing a cutting-edge product, process or service to market, chances are you’re doing research and development.


Another common misperception is that R&D Tax Credits aren’t available to certain sectors. The truth is, research & development projects from all industries are eligible! All you need to do is determine how R&D manifests itself within your project.


Let’s say you’re undertaking research and development within construction. Here, R&D spending will feed into tasks such as enhancing safety, testing, prototyping, developing new welding processes to minimise distortion, and so on.


However, R&D spending for a software development project would look a little different. Think platform development, bespoke coding, network security etc.


Some founders are deterred from claiming R&D Tax Credits based on their business’ financial position. It’s worth knowing that both loss-making and profit-making companies are eligible!


In the SME R&D Tax Credit scheme, loss-making companies can claim up to 33% of R&D expenditure, whereas profit-making companies are entitled to claim up to 25%.



2. Bookkeeping mistakes trigger HMRC enquiries. 📑


The easiest way for your claim to land into an enquiry process is to submit it with incorrect research & development figures.


Bookkeeping is the backbone of your R&D Tax Credit Claim, particularly within the financial report section.


Even the smallest inconsistency will interfere with the validity your overall claim. For this reason, a vital player in your r & d claim is a trustworthy accountant.


Feel free to take a look at some of our recommended Accounting Partners on our Partnership page.



3. You’re claiming under the wrong scheme. 🔎


Some people don’t know that, under the umbrella of R&D Tax Credits, two separate schemes exist. This causes frustration for some businesses, as they apply for the wrong scheme and face rejection.


The two R&D Tax Credit schemes are fairly simple to distinguish. Let’s run through the criteria for both, and how they affect your potential claim size.


SME R&D Tax Credit Scheme:

You may have noticed the term SME R&D Tax Credit scheme crop up earlier on, regarding how much money loss and profit-making companies can reclaim.


The SME scheme is what most businesses claim R&D Tax Credits under. To qualify, businesses must have:

  • Less than 500 employees;

  • Less than €86M in gross assets;

  • Less than €100M in turnover.


RDEC R&D Tax Credit Scheme:

The RDEC R&D Tax Credit scheme caters for businesses that exceed the metrics of the SME scheme.


As RDEC projects have a significant financial advantage, this scheme allows for 13% of R&D spending to be claimed back (subject to corporation tax).


Though this figure is much lower than that of the SME scheme, the size of RDEC businesses means that huge amounts of money are still up for grabs.


To clarify, criteria of the RDEC R&D Tax Credit scheme is as follows:

  • More than 500 employees;

  • More than €86M in gross assets;

  • More than €100M in turnover.



4. You’re not using a specialist R&D Tax Credit advisor. 🏆

We’ve already discussed how presenting the wrong figures in an R&D Tax Credit claim can result in disaster. But this is something that’s not always easy to spot.


Yes, incorrect numbers are a tell-tale sign that your accountant isn’t cutting it. But if you dig a little deeper, you may find that even the most experienced accountants aren’t able to get the most out of your R&D Tax Credit claim.


This is because your standard accountant may not have specialised experience in research and development, and therefore might not recognize the full extent of R&D spending that you’re able to claim.


At Claim Capital, our experts know how research and development expenditure appears differently from sector to sector. This naturally maximises the size of our clients’ R&D Tax Credit claims, securing every penny possible from HMRC.


Our client, Unissu, is one example of how our specialised approach outperforms traditional advisors.


Unissu came to us questioning their accountant’s ability to optimise their R&D Tax Credit claim. After looking into their previous r & d claim size, our experts uncovered a significant shortfall, and successfully added £32,000 on to their ongoing R&D claim.


 

If any of these situations sound familiar, you could be missing out on non-dilutive, non-repayable cash from HMRC.


R&D Tax Credits are a fantastic springboard for UK innovation, so founders should make sure that they’re taking full advantage of the scheme.


By recognising and avoiding the above pitfalls, you’ll be on your way to receiving a lucrative R&D Tax Credit claim, to contribute to the growth of your business.


If you want to file an R&D Tax Credit claim the right way, or are worried your underclaiming, get in touch with our R&D specialists today.