Written by Prad Mahan
Even though the UK’s Research and Development tax relief scheme has been around for over 21 years, there are still several misconceptions regarding the incentive, how it works and who can utilise it. This means that there are thousands of companies who are either underclaiming or not claiming at all. This article will look to dispel the myths and misinterpretations of R&D tax relief.
“Only the largest companies undertake Research and Development, I cannot claim R&D tax relief.”
A lot of companies are immediately close themselves off to the idea of an R&D tax claim on the basis that they don’t do any research or development in the conventional sense of the words. Typical connotations to R&D are Formula 1 teams or NASA and this ultimately casts a shadow over what R&D is defined by as HMRC and who can therefore claim. Whilst large companies do claim, so do small. In fact, smaller companies, termed ‘SME – Small Medium Sized Enterprise’ by HMRC can actually recoup a larger proportion of their costs spent as opposed to larger companies. This highlights two things, the first being that R&D tax relief is for everyone, why specifically have a scheme for SME’s if they couldn’t take advantage of it? And secondly, HMRC value any R&D undertaken by smaller companies just as much as those by large entities if not more. Why? Because the purpose of such an incentive is to advance the UK industry as a whole, not just multi-billion pound turnover companies.
“I am a loss-making company and do not pay corporation tax, I cannot claim R&D tax relief?”
The R&D tax relief scheme is created to reduce a company’s Corporation tax liability so it is understandable why a company not paying corporation tax may believe it to be impossible to reduce something that doesn’t exist. However, if a company is loss-making prior to making an R&D tax relief claim, they can reap the awards of the benefit by either claiming it as a tax credit or using the benefit to offset future corporation tax liabilities. In fact, companies that are loss-making are able to claim back a higher proportion (33%) of their Qualifying Expenditure in comparison to profit-making companies (25%) and Break-even companies (19%). This is illustrated in the diagram below.
“Submitting a claim will draw unwanted attention from the HMRC into my tax affairs, I should not claim R&D tax relief”
This urban legend has been circulating around the industry since the scheme has commenced and has put off many companies who are eligible from the scheme to claim back their qualifying costs. The scheme was created to incentivise growth in the UK economy and not as a trap to then punish companies retrospectively for claiming on the scheme. HMRC have recently pledged that they are aiming to process 95% of claims within 28 day of being filed which further shows their commitment to ensuring the scheme is running as smoothly as possible.
HMRC has also recently hired an additional 100 compliance officers to ensure that all claims meet the criteria. This is a measure which whilst on the surface it may not seem so, will benefit both parties. HMRC will be able to improve compliance and the company’s claims will be less likely to face enquiries after payment, an occurrence previously due to a build of claims.
Whilst there will always be myths and misinterpretations around Government incentives and HMRC, it is important to remember that as this article has demonstrated, there is often a logical explanation to each one.