De-bunking the myths on R&D tax credit claims
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Despite the fact that HMRC’s R&D tax credit scheme is now close to 20 years old (how time flies!), there are still quite a few stubborn myths and questions that never quite seem to go away. To help banish them once and for all, we’ve compiled a list of three of the most common – we hope these haven’t got in the way of your claims over the years!
Myth 1: “We can’t claim for projects that failed”
Like many good myths, there’s an element of truth to this. If the project has failed for business, commercial or legal reasons (or, gulp, due to poor leadership or mismanagement) then yes, that’s not good.
If, however, the project failed for technical reasons, then from the perspective of R&D tax credits, this can actually be positive, as it shows that what you were trying to achieve was genuinely challenging, even for experienced people.
So, if projects fail, you don’t necessarily have to push them into a darkened room and forget about them.
Top tip: Instead, keep a note of why that project failed, and if it’s a technical reason, the work might be worth considering as part of your claim when you come to your year end.
Myth 2: “We can’t claim for projects that received grants”
Ooooh, this is a horrible one – and we hear it quite a lot. It’s horrible because people believe it, don’t look at how the scheme works and end up losing out big-time as a result.
Unlike Myth 1, there is no element of truth to this. You can claim for grant-funded projects, but you’ve got to do it correctly and the benefit you receive will vary depending on the size of the grant and whether it’s Notified State Aid.
As a rule of thumb, if a project has received Notified State Aid (no matter how small) then all of that project’s expenditure should be routed through the Research & Development Expenditure Credit scheme (RDEC) – that’s normally used by Large Companies.
Conversely, if you have a £100k project that’s been subsidised by a £30k grant that is not Notified State Aid, then £30k of the project would go through RDEC and £70k will go through the SME scheme.
Top Tip: The moral of the story is: find out what type of grant you received!
Myth 3: “We can’t claim for the work because we were paid to do it”
This is a really interesting one. Again, it’s based on truth, in that if you are contracted by an SME to perform R&D, you can’t claim (instead, the commissioning SME will be claiming R&D tax relief on the payment they made to their subcontractor – you).
However, the first point to make is that if you are commissioned to perform R&D by a Large Company (usually one with 500 or more staff), then you are generally able to claim through RDEC yourself, as the commissioning Large Company cannot claim R&D tax relief on the costs of its Limited Company subcontractors.
The other, more subtle point, is that many contracts between companies and their subcontractors do not explicitly state the need for R&D. In short, the contract is for a defined piece of work and the need for R&D is often not mentioned.
Now, it may be that as a subcontractor delivering such a contract, you can do what’s required by using existing knowledge, processes and techniques. In this case, no R&D is involved and it would be inappropriate to claim R&D tax relief.
On the other hand, you may decide to launch your own project – at your own cost and risk – to develop a new capability that will assist in delivering upon this contract, and similar contracts you might win in the future. In this case, there’s usually an argument to be made for claiming R&D tax relief under the SME scheme.
Top Tip: Check if the contract with your client explicitly states the need for R&D and if you have an argument for making a claim.
Don’t get bamboozled!
The great news is that all of these myths are comprehensively busted in our software platform, WhisperClaims, which was designed from the ground up by people who’ve worked in R&D tax credit consultancy for years. The software helps you evaluate work that might have failed, handles all kinds of grant situations (such as using Notified State Aid and de minimis funding on the same project, for example) and even takes you through the complexities of working as a subcontractor for other entities, whether SMEs or Large Companies.