6 of the Most Common Mistakes When Making R&D Tax Credit Claims

Let me start out by saying - companies can make their own Research and Development (R&D) tax credit claims. They don't need to work with professional advisors, such as Zest, to assist them with a claim. However - if they choose to do go it alone, there are plenty of mistakes they can make, and places they can slip-up. The result of these mistakes when making an R&D tax credit claims can vary; from having your claim rejected, missing out on a large amount of the tax credits value, or even to fines being issued by HMRC. This post details 6 of the most common mistakes we see from companies who decide to make their own R&D tax credit claim.

So it's time to get started - here's mistake number 1.

1. Applying for the Wrong Scheme or When You're Ineligible

There are two types of R&D Tax Credit - the Small and Medium-sized Enterprise (SME) scheme, and the Research and Development Expenditure Credit (RDEC). The SME scheme can only be utilised by companies with fewer than 500 employees, a yearly turnover of less than €100 million and a balance sheet below €86 million. RDEC is designed for the remaining, larger companies.

But as ever - it's not quite that simple. There are further rules with regards to State Aid, that can make some companies and projects ineligible to claim under the SME scheme. And if you are an SME who has been sub-contracted to provide R&D services to a large company - you may also be eligible to claim under RDEC. Not understanding these rules can lead to significant mistakes for companies making R&D tax credit claims.

2. Not Identifying all of Your R&D Projects

One of the key steps in making an R&D claim is to determine what projects you can claim for. That sets you up for your next potential mistake. One common error is that R&D projects which were not successful are not included. However, in reality, there are two main criteria you need to have met for your project to qualify:

1. Uncertainties in your work - you need to have identified uncertainties with regards to the work you are undertaking. In order for your project to be successful, you'll need to have resolved these uncertainties. The uncertainties must not have been readily resolvable by a competent professional in the field.
2. Scientific or technological advance - you need to have been aiming for some kind of advance in the fields of science or technology. This advance can be specific to your industry.

Interpreting these rules in the context of projects can be challenging. This is another area where professional advice can be critical. If you make this mistake when making your R&D tax credit claims, you're missing projects from your claim. This means you're missing out on tax credits from the government and you aren't being rewarded for your innovative work. Depending on the project - this mistake can lead to huge reductions in the return for your claim.

3. Missing Eligible Project Costs from Your Claim

One of the most common mistakes when making an R&D claim is not including all of the eligible costs, or even including costs that aren't eligible. There are a wide range of costs which can be included, but the legislation can be confusing. Misunderstanding the rules can lead to claims being investigated by HMRC, or seriously undervalued. Some of the most common errors are with regards to material and staff costs.

Inclusion of material and consumable item costs can be extremely complicated. There are some exceptions and intricacies around the rules that can have a disproportionate impact on your claim. Consumable items, such as fuel and power, which are used up as part of the R&D process - are usually eligible. Materials can also be eligible if they are used in prototyping of a product. That means, if they were incorporated into a product that goes on to be sold in the regular course of business - they are unlikely to be eligible. In context, these rules need to be considered carefully, and experience can be critical in understanding what costs can be claimed for. As an example; I've worked on claims where the additional eligible material costs weren't immediately obvious to the client but added hundreds of thousands of pounds to their returns.

When including staff costs, you can include wage costs for any staff member who worked on the project. Make sure you don't forget any employer National Insurance or Pension contributions. You may also have travel or subsistence costs associated with your R&D. These expenses must have been paid by the employee and reimbursed. If they were paid directly out of the companies funds, they can't be included. It is common for these costs to be missed entirely - or worse, included when they aren't eligible.

4. Only Claiming R&D Costs to Reduce Your Corporation Tax Bill to £0

When making a claim - you may not realise that R&D Tax Credits don't just impact your corporation tax bill for the year in which you conducted R&D. The mistake here - is to stop including costs in your R&D claim once your taxable trading profit reaches £0. This mistake can be huge, especially if you haven't included large chunks of your expenditure in your claim. If you include all of the eligible costs in your claim, and the tax credit reduces your trading profit below £0 - this works to your advantage. When your R&D Tax Credit takes your taxable trading profit below £0, you have two options:

1. You can carry your trading loss forward - using it to reduce your corporation tax liability against future profits.
2. Or you can surrender your loss for a payable cash sum. For most companies - this payable cash sum can make a big difference to cash flow.

5. Not Accounting for Sub-contractors or Agency Workers

It is perfectly legitimate to claim costs related to sub-contractors or agency workers - also referred to as Externally Provided Workers or EPWs. However it is important that due consideration is taken so the costs are correctly apportioned. You need to consider three things here.

1. The work conducted by the EPWs or sub-contractor needs to be directly involved in the R&D project. When considering their work independently - it doesn't need to qualify as R&D. However only the cost of the work they are performing that is related to the project will qualify for the claim.
2. Is the third-party agency or sub-contractor connected to the company making the R&D claim? If the two entities have the same shareholders or are otherwise controlled by the same people - they are connected parties. You can find the full definition at this link. This means that the eligible costs for R&D are the lesser of the payment that is made to the connected party and the relevant expenditure of the connected party.
3. If the parties are not connected then the costs included within the R&D claim must be reduced by 65%. It is a common mistake to forget to make this reduction - and doing so can lead to extra scrutiny and potential sanctions from HMRC.

6. The Biggest Mistake - Not Making a Claim at All

The biggest mistake when making an R&D Tax Credit claim is not making a claim at all. It is easy to miss opportunities. Some people are uncertain whether their project qualifies for the tax credit. Others don't get round to it because of the time burden. However missing out on this scheme can be costly - with the average SME claim for the most recent year currently standing at £57,000.

If you're considering making a claim - feel free to get in contact for a free consultation. We offer specialist advice which will maximise your claim value, minimise the time you need to spend away from your work, and reduce the risk of an HMRC investigation and sanctions.