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Tips to maximising your R&D tax credit claim

If you want to get the most benefit for your client’s business through R&D tax credits, you have to maximise your claim. This will involve doing a lot of research and sometimes it’s difficult to even know where to start when preparing your application. It’s worth it to put in the time and effort though, as without it you could miss out on thousands worth of savings.

1. Figure out your company size

Although almost any company can apply for R&D tax credits, HMRC offers tax credit incentives for firms that are either SMEs or large companies. You should familiarise yourself with the following definition HMRC uses to calculate the size of companies:

  • SMEs: Less than 500 employees, a turnover of less than €100 million and a balance sheet worth below €86 million.
  • Large companies: More than 500 employees, a turnover of more than €100 million and a balance sheet worth over €86 million.

SMEs qualify for the SME scheme while large companies qualify for the Research and Development Expenditure Credit scheme(RDEC).

The SME scheme is far more generous than the RDEC, offering a much higher percentage of claimable R&D expenditure. As such, you will be able claim more on their R&D tax credits as a small or medium size company.

2. Know what you can and can’t claim

Deciding what costs you will claim is going to determine the scale of the tax savings they will benefit from. The more total costs your client claims, the more valuable their R&D tax credit will become. However, if any of the costs claimed turn out to be incorrect then they could be faced with an HMRC investigation. This is why knowing the extent of the costs you can claim is so important.

Some things to note:

  • Always work within the company’s financial year, not the tax year of HMRC. Any expenses outside the relevant financial year, qualifying or not, are not eligible to claim.
  • You cannot list your client’s directors as subcontractors when calculating R&D expenditure. This means you also can’t claim directors’ dividends as qualifying R&D expenditure. HMRC cross-checks companies’ listed directors so make sure this is done right.

3. Receiving grant funding won’t always compromise a claim

More businesses than ever have received some form of financial aid due to the damage done by the Covid-19 pandemic. It’s likely you fall into this category and they’re resultantly skeptical about whether they can still claim R&D tax credits. This doesn’t mean their projects are unclaimable though.

If your grant falls under the category of notified state aid then they unfortunately will not be able to claim R&D tax credits under the SME. They are still open to pursue a claim through the RDEC though. Non-notified state aid will affect the eligibility of your projects depending on how much funding was contributed towards them.

4. Utilise your losses

Just because your company is unprofitable doesn’t mean they should be discouraged from applying for R&D tax credit. Utilising the ‘surrendering a loss’ mechanism allows unprofitable companies to obtain a short term cash injection from HMRC.  In this way, the total loss is exchanged for cash credits at 14.5% of the original value. If you expect to be profitable in the next year we wouldn’t advise surrendering their losses. This is because they can be used to offset the tax on their profits in future.

If your concerned about this looking bad on their books don’t worry, enhancing their loss through the tax incentive schemes won’t be reflected in the accounts.

5. Spend time on writing a great technical narrative

Outlining your R&D projects, the work they’re doing and how it fits within HMRC’s definition of R&D, is really the meat and potatoes of any R&D tax credit application. Here are some do’s:

  • Keep it short and concise – this helps your application to be as easy to digest as possible.
  • Don’t use language unique to your field – you want HMRC to understand the problem you has solved, as well as the lengths they’ve gone to to solve it. 
  • Write from a technical point of view – prove that you have overcome a technical uncertainty or made advances in technology. That’s what HMRC are looking for.

6. Check your numbers

This can be a time consuming process but sitting down and checking your figures match on every part of your application is a must. This includes their profits and loss, tax calculations, along with the contents of their CT600. If all your costs are consistent with each other it helps HMRC to process the claim more easily.

 

Contact us to see how we can work through this process with you.

 

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