8 common mistakes in R&D Tax Relief claims

Here, we take a look at the common areas where mistakes are made in R&D tax relief claims, according to HMRC, and consider how to avoids these pitfalls.

1. Project activities outside the scope of R&D included in the claim

R&D tax relief is given for activities for attempting to resolve an element of the scientific or technological uncertainty associated with achieving an advance in a field of science and technology. This specifically excludes any commercial or financial steps necessary for the innovation, e.g. market research, and the production or distribution of goods and services.We will work with you to carefully consider the R&D project as a whole, identifying the period when activities to resolve the scientific and technological uncertainties begins and ends. Our R&D Tax Credits Eligibility Checklist can help - take just 10 minutes to find out whether your project is eligible for a claim.

2. Expenditure outside the qualifying categories is claimed

Not all project costs qualify for R&D Tax Relief – only those costs which come within certain very specific legislative categories. Our process ensures we discuss the costs to include in the claim with both the technical and finance teams

3. Staffing costs are claimed for those who are not employees

Only those individuals with an employment contract with the company form part of the staff costs for an R&D tax relief claims

However, it may be possible to claim for costs under the Externally Provided Workers rules, or as a sub-contract cost, and we will explore this with you.

4. Claims are made for overheads which do not qualify as consumables

This is an area which HMRC tightened their approach to from 1 April 2015. Essentially this allows for a company to claim for the costs of items which are consumed or transformed in the R&D process.

It’s essential to split out any consumable costs which form part of goods which are sold and again this is something we will consider in detail with you when preparing the claim.

5. The special rules for connected parties are not applied

The connected party rules apply to various costs and usually when they apply, it is to the company’s benefit.

Often for existing clients of the wider firm, we will have a detailed knowledge of any connected parties the company has but for all clients, we ensure we cover off this point as a matter of course.

6. Companies claim under the SME scheme where this is not available

The most generous of the R&D schemes is the SME scheme, which applies to companies meeting certain size limits. However, these limits are not considered on an individual company basis – ‘linked’ and ‘partnership’ enterprises need to be considered too.

Also, SMEs cannot claim under the SME scheme where they are working on a sub-contract basis or where they are in receipt of State Aid. Our process ensures that we address all of these points at an early stage so there are no nasty surprises later on

7. The special rules for sub-contracted expenditure are not applied

Companies can claim relief for certain costs paid to sub-contractors, but this is not the case for all sub-contract costs, and a reduced rate of relief is available

As part of pulling together the claim, we will discuss any parts of the R&D project which are fulfilled by other people on your behalf, and establish what, if any, relief is available.

8. No account is taken of subsidies or Notified State Aid

A company receiving any form of Notified State Aid for a project cannot claim SME relief at any time for that same project. This will have a very significant effect on the amount of relief available. Subsidies other than Notified State Aid will also impact on the claim, but to a lesser extent.

Establishing whether a company has received any grants or subsidies, and whether or not these are Notified State Aid, is addressed at an early stage in our work, as we are very aware of the impact this can have on a claim.

Do you need help with an R&D Tax Relief claim?

If you have any queries on this, please contact any member of the Shorts’ Radius team, or your usual Shorts contact.  Our team comprises a team of dedicated tax professionals who implement a process developed from years of experience working on R&D tax relief claims, which ensures each one demonstrates compliance with HMRC guidelines.