R&D Tax Reliefs & Credits and Top 3 Misconceptions
15th June 2022
The HMRC offers a tax credit to innovative companies that can demonstrate they are carrying out research and development towards the delivery of scientific and technological advances. These Research and Development (R&D) tax credits can be applied to either profit-making or loss-making companies to reduce the tax burden on the business.
The ability to claim back research and development (R&D) tax relief or credit on development projects is a significant benefit. The R&D scheme applies a formula that allows up to 33.5 percent of a company’s spending on R&D to be claimed back either as a cash credit or a current or future tax offset. The funding is especially advantageous for small and medium-sized businesses (SMEs), while larger companies can also benefit, at a lesser rate.
However, many businesses fail to file a claim for these funds. Small businesses infact often believe that the benefit does not apply to them.
Data from HMRC suggest that more than £84 billion of R&D tax credits have not been claimed, while it is estimated that around 80 percent of eligible companies have either not claimed or have been under-claimed. This is far from ideal, especially given that the scheme is relatively generous and is intended to support the growth of SMEs.
Here are some common misconceptions about the R&D tax credit scheme:
Misconception 1: Who and what qualifies as “Research and Development”
One of the main reasons companies fail to claim for R&D tax relief is the misconceptions around who can claim and what qualifies as R&D. Many businesses might assume that what they’re doing is not particularly innovative or qualifies as “research” . However, projects of varied levels can be considered eligible for the tax credit scheme. To qualify:
- An advance in science and technology needs to be made
- There must be a need to overcome technological uncertainties.
- It could be certain types of activities carried out to create or improve products, processes, or services. For instance, changes such as using a new material to develop a manufacturing component, changing a recipe to lower the levels of sugar in food manufacturing, or creating a process to integrate data could all be considered R&D activities.
Misconception 2: You need to be successful with your R&D to claim the benefit
A business’ R&D project does not need to be successful to claim the benefit. The government acknowledges that R&D is difficult and sometimes the desired outcome will not be achieved. R&D projects that don’t conclude with the desired results can be very costly for a business. Even if the sought-after technological or scientific advancements are not obtained, the scheme acknowledges that research and development activities have taken place and therefore could still qualify for funding.
Misconception 3: If you don’t submit the claim by your tax year’s deadline, then it’s too late to claim
The third misconception about R&D tax relief is that if you don’t submit the claim by your tax year’s deadline then it is “too late” to claim. Infact, businesses have up to 2 years after the end of the tax year to claim tax relief on R&D projects undertaken. For example, if your accounting year runs from 1st July to 30th June each year, you have up until the end of June 2022 to submit a claim for the year ending June 2020. That means that if your company hasn’t been claiming, you could start right now and claim up to two back years, earning your business a well-deserved cash injection.
Other funding options
While the R&D tax credit scheme is a great initiative, it needs to be acknowledged that waiting for a company’s R&D tax credit to be paid out by the HMRC is often a long, tedious process. Also, companies have to wait until after their financial year end to access their R&D tax credit refund.
Fundsquire’s R&D Advance funding provides businesses early access to their funding by lending against its future R&D tax credits. This advance funding, available anytime during the financial year, empowers businesses with working capital and further increases investments on R&D activities. This leads to a virtuous cycle where your future R&D tax credit is fuelling your current innovation spending, increasing the size of the final tax credit.