Research & Development tax relief: common mistakes we see on claims already submitted to HMRC

Here at Chiene + Tait, our team of full-time Research & Development (R&D) Tax specialists work with many different sized companies across various industries. Whilst the majority of our work is first time submissions, we also review and amend previously submitted claims. Time and again we see companies over and underclaiming their eligible relief due to the complexities of the legislation. Eilidh Hobbs, Entrepreneurial Supervisor, highlights key points to be aware of:

Grant funding

Receiving grants can impact upon the level of relief a company is entitled to claim, causing some or all of the qualifying project expenditure to be ineligible under the SME scheme, potentially for the entire life of the project.

Because many companies rely on grant funding during the start-up phase, they often describe their entire business model, including the R&D project, in their grant application in attempt to secure the funding. The grant application is used to determine which of the company’s activities are subsidised, so if the entire business model is described, the R&D project could be impacted by the grant. Therefore, it is important to keep this in mind when applying for grants and weigh up the potential benefit of an R&D claim vs the grant amount.

Contracts with customers

In some instances, if you have been approached by a customer to undertake work, R&D resulting from this still may be eligible for relief. Two of the main factors that need to be considered are whether the company retains the right to benefit from the IP generated and whether the company bears the economic risk. Any subsidised costs are ineligible under the SME scheme, but a claim can be made under the RDEC scheme.

Third party costs

Costs incurred on engaging subcontractors or externally provided workers are eligible categories of expenditure. The treatment of subcontractor costs is different under the RDEC and SME schemes.

Under the SME scheme, payments made to any type of party qualify, but a statutory restriction of 65% must be applied to these costs, unless they are a connected party or an election to be treated as an elected party has been made.

Under the RDEC scheme only costs incurred in engaging an individual, partnership or qualifying body can be claimed. These costs only sometimes need to be restricted to 65% and this depends on certain factors specific to the project.

Externally provided workers are only eligible for relief where a payment is made to a staff provider supplying an individual to the claimant company, therefore payments made to a self-employed individual do not qualify. Furthermore, if the externally provided worker is a director or employee of the claimant company these costs are not eligible. These costs should also be restricted to 65% if the parties are not connected.

Non-qualifying costs

We often see costs incorrectly included in claims that are not eligible for relief, such as those incurred on capital items, materials that go on to be sold in the ordinary course of business and rental costs.

Here at Chiene + Tait, our R&D specialists have years of experience preparing and submitting successful claims for hundreds of companies, across both schemes, in multiple industries.

If you are considering claiming relief and would like to hear how we can help you, please email us at RDtax@chiene.co.uk.