Tax credits for research and development (R&D) are widely misunderstood.
Only about 20% of businesses claim them, and most of the reasons why they’re not claimed aren’t valid. So a lot of your clients are missing out. Here are some of the biggest myths around R&D tax credits, and the truth behind them.
1. ‘Most companies aren’t eligible for R&D tax credits’
A pig farmer, a client of mine, decided to find a way to improve his yield. He trialled different diets, types of pig sty and ways to control the temperature. A lot of that work was based on trial and error, analysis of results and repetition until a consistent performance was achieved. That is R&D. There are no limits on the types of business that can claim. If the claimant is a limited company that is profitable and pays corporation tax, it is eligible. Eligibility is based on the activity undertaken, not the sector the company is in.
2. ‘The activities the company does won’t qualify’
The qualifying activities are very, very broad. For example, there’s a man I know who sells processed meat to the delicatessen market, which wants it to be sliced and to look ‘right’. One of his main products is corned beef, which is delivered in tins about a metre long. But slicing corned beef results in 16% of the produce being wasted. He spent three years looking into ways to reduce that waste, eventually coming up with a solution that wasn’t commercially viable – but he was still able to claim.
3. ‘You don’t get much money back’
The average first claim for my clients is £55,000 and we’ve had some claims of over £500,000. Some of the lower claims are still in the region of £3,000 to £4,000. A one-man band who creates computer-generated imagery just successfully claimed £4,300, and couldn’t be happier. In a way, it means more to him than to a company with a £10m turnover.
4. ‘Submitting a claim is a hassle’
A typical claim involves establishing what R&D work the company does, and then looking back at activities across two complete financial years. You need to establish the details: what issues were being solved? What was difficult about it? What worked and what didn’t? Then you need to write the narrative of the claim. Finally, there is the financial element, where you calculate costs relating to staff, sub-contractors, materials and utilities. You can work with a specialist in this field, which can help minimise the amount of work.
5. ‘The R&D activities are too old to claim on’
Many companies think you can’t claim on research done over a year ago, but you can go back two financial years. It also doesn’t take long to make a claim, so a company that is approaching the cut-off point for some research work can put in a claim quite quickly. A packaging company started looking into R&D tax credits on 25 January; its year-end was on 31 January. Within three weeks, it got a £5,000 tax credit.
Phil Tooley is an R&D consultant for Randd UK.