Here are GrantTree’s top 8 tips for preparing an accurate, compliant and fully-maximised R&D Tax Credits claim.
Preparing an R&D Tax Relief claim is complex, precise work.
It takes a mixture of financial rigour, technical expertise and legislative understanding that few companies have in-house.
To make matters worse, if your claim contains errors or HMRC suspects that you are submitting ineligible development work, you could face an HMRC compliance check. This could delay your funding by several months.
These complexities are why many businesses choose to file with an R&D Ta Credits specialist like GrantTree.
Of course, some companies still prefer to file R&D Tax Credits themselves. And we wanted to make life a little easier for them.
That’s why, calling on more than a decade’s experience, we have compiled our top tips for claiming R&D Tax Credits yourself.
We hope you find them useful!
Tip 1: Work out how big you are
When it comes to R&D Tax Credits, HMRC says companies come in two sizes: SME (small to medium) and large.
SMEs usually qualify for SME R&D Tax Relief (which is far more generous), while large companies are only eligible for the Research and Development Expenditure Credit (RDEC). There are some exceptions, which we’ll cover later.
Before tackling your claim, you need to work out how big you are. Under R&D tax law, HMRC says a large company is one with either:
- More than 500 employees
- Or an annual turnover of over €100 million and a balance sheet worth over €86 million
A business that falls below these criteria is considered an SME and qualifies for the SME scheme.
But size isn’t everything. Some companies have to claim through RDEC, even though they meet the definition of an SME.
Check out our handy guide to working out which scheme you should claim for and what to do if it changes size.
Tip 2: Don’t take Tax Credits for ‘Grant’ed
If you’ve received grant funding, it could affect your tax credits claim. The nuance here is whether your grant contributed to the projects that you’re claiming tax credits for. In that case, it depends on what kind of grant you’ve received.
There are two kinds: notified state aid and non-notified state aid.
Notified state aid grant
If your grant was notified state aid, you can’t claim tax credits under the SME scheme for the project that’s been funded by the grant.
However, you can claim for tax credits under the RDEC scheme.
Non-notified state aid grant
If your grant was non-notified state aid, your project’s eligibility for R&D Tax Credits depends on how the grant contributed towards its funding.
- If the grant-funded the whole of the project, you should file under the RDEC scheme, which will return up to 9.7% of your development costs. That’s in addition to the grant funding you’ve already received. Note: This scheme only covers the qualifying expenditures of payroll, externally provided workers, and R&D consumables. Subcontracted expenses can’t be included in your claim.
- If the grant didn’t contribute towards any of the project’s R&D-related expenditure, then it won’t affect your tax credits claim.
- If the grant funded only a portion of the project’s R&D expenditure, you can claim tax credits through a combination of the RDEC and SME schemes. Tax credits from the RDEC scheme will apply to the expenditure covered by the grant. Tax credits from the SME scheme will apply to the remainder.
It might look a little complicated, but if done correctly your business could benefit from both R&D Tax Credits and grant funding at the same time, giving you a lot more money to invest in your business’s growth.
Tip 3: Know what you can (and can’t) claim for
Knowing what you can and can’t claim for is one of the most important parts of the process. It’s also pretty difficult.
On the one hand, you want to claim for as many of your qualifying costs as possible to maximise your windfall.
On the other, incorrectly claiming for things is an instant red flag for HMRC and could delay your claim or trigger a lengthy compliance check. AKA an enquiry.
Here’s how to avoid the two most common mistakes companies make:
- Remember to always work in your company’s financial year, not HMRC’s tax year.
Expenses outside of the financial year you’re working in aren’t eligible in that year’s claim. So always double-check you’re claiming for expenditures in the right calendar and time frame.
- Unfortunately, you can’t list your directors as subcontractors. HMRC always cross-checks your listed directors.
If they appear on Companies House, your claim will be flagged and could be delayed.
Make sure your directors are correctly listed. Also, you can’t claim directors’ dividends as qualifying expenditure in your application
Tip 4: Be savvy with your losses
One of the key tactics we use to maximise your tax credit return involves ‘moving around’ your losses.
Using a mechanism called surrendering your losses, even unprofitable companies can claim R&D Tax Credits and get some cash out of HMRC.
But should you use this mechanism? It depends.
Generally, it would be better to carry the loss forward and offset it against future profits, at a rate of 19% (the lowest rate corporation tax is charged at), than to surrender it immediately at a rate of 14.5%. However, in order to be offset successfully in future years, there needs to be actual profit.
Here’s the key: If you are expecting continued tax losses in future years, then you should surrender the present loss.
Carrying losses around is a complicated procedure, but it could earn your business an even greater return.
Rather than attempting it yourself, we recommend speaking to an R&D Tax Credits expert who could take you through the process.
Tip 5: Know if your company is 'linked'
Not all small businesses qualify for the SME R&D Tax Credit scheme. If a small business is part of a larger organisation, the two companies could be considered ‘linked’.
If a company is linked to another, the finances and employee manifest of the entire umbrella businesses must be taken into account when working out the company’s size (via the calculation referenced in the first tip).
This contingency often makes smaller businesses ineligible for the SME scheme, meaning they must apply for the RDEC scheme instead.
Companies often miss this point and file under the wrong scheme. So, here’s a simple test to determine whether your company is linked to another. Your company is considered linked if any of the following is true.
Linked company checklist
- More than 50% of the capital or voting rights of your company are owned by another company
- Another company can appoint or remove any of your management team
- A third party company can exert a “dominant influence” over yours
- Another company can indirectly achieve the above via agreements with other shareholders
If another company owns 25% to 50% of your company, they are considered a partner enterprise. In that case, the finances and headcount mentioned above need to be aggregated accordingly and added to the size of the claiming company.
There are exceptions to the ‘partner enterprise’ rule. If another company owns more than 25% of your business, you could still be considered autonomous if the other company does not exercise its control. This is true if the capital is owned by any of the following:
- Public investment corporation and VCs
- Individuals or groups of individuals with a regular venture capital investment activity who invest equity capital in unquoted businesses (‘business angels’), provided the total investment of those business angels is less than €1.25 million
- Universities or non-profit research centres
- Institutional investors, including regional development funds
- Autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants
Tip 6. Choose the right project(s)
Our next tip for claiming R&D Tax Credits is to ensure you’re selecting the right project(s) to claim for.
The difficulty is that the definition of ‘project’ changes depending on the context. Let’s use Microsoft Word as an example.
In one case, we could classify the entire development of Word – from concept to market delivery – as one project. In another, we could say that specific changes to the back end of Microsoft word, for example smoother integration with Outlook, as projects in their own right.
What you define as a ‘project’ basically depends on the granularity of detail. In other words, how many pieces you divide an activity into.
Generally, you want to set the detail level so that you end up with 3-5 projects, and cover 1-3 of them at most in a claim.
It’s fine to cover a single project in your claim, so long as that’s a good presentation of what actually happened.
Tip 7: Use the CT600 Shortcut
The CT600 is the green document you submit each year along with your financial calculations that gives HMRC an outline of your tax position.
We’ve discovered a way to use the CT600 form to accelerate the processing of your claim and lower the likelihood that it’ll face an HMRC enquiry.
Here’s how it works.
You file your tax return as normal, including the CT600, but omit the R&D Tax Credit claim amount. We then submit an amended CT600, which does include the R&D Tax Credit claim amount.
This ensures your application goes directly to an HMRC R&D Tax Credit specialist. They are more likely to understand your application and less likely to launch an enquiry.
That’s the gist. The actual process isn’t so simple.
Tip 8: Reconcile, reconcile, reconcile
Finally, before you file, go through your claim with a fine tooth comb and double (triple, quadruple!) check that all your calculations can be matched back to your P&L, the tax computations and the CT600.
There’s no bigger red flag for HMRC than numbers not adding up. For instance, if you are claiming £200,000 for subcontractors and there is only £45,000 against ‘Subcontractors’ in the P&L.
All costs must be matched and consistent with each other so it is easy for HMRC to identify which costs are located where.
Speak to an expert!
That’s the end of our tips for claiming R&D Tax Credits. We hope you find them helpful.
However, all the advice in the world can’t beat working directly with an R&D Tax Credits specialist like GrantTree.
We’ve helped over 2,000 UK innovators claim more than £350 million in funding through the R&D Tax Relief scheme.
If you’re looking to maximise your claim and minimise your chances of an enquiry, our tax and technical experts are standing by to help.
Just drop us a line, and our people will be right with you!