R&D tax claims - five common mistakes
On top of the thousands of claims we’ve made in the last ten years, YesTax also has extensive experience in dealing with HMRC enquiries on behalf of accountants who have made their own claims. This has given us a valuable insight into the common mistakes which advisers make – and which HMRC may focus on during an enquiry. Here we outline the five mistakes which we come across most frequently.
Not claiming at all!
Of all the mistakes to make, this is the one accountants and other advisers will want to avoid the most. We’ve all come across a client that has been undertaking qualifying R&D since the dawn of time – but has only just been alerted to it by their accountant. Prior to 2008, when the rate of additional relief on qualifying expenditure was 50% and the scheme was not well publicised, the failure to spot a claim was forgivable. However, it’s a completely different story these days. The failure to spot a claim can have regrettable consequences for client and adviser. If you’re an accountant and you’re reading this, are you absolutely sure you’ve bottomed out your client portfolio in the search for a potential claim? If not, we can help.
Claiming for non-qualifying activity
At the opposite end of the spectrum, we often see claims being comprised of non-qualifying projects. Sometime this is borne out of a genuine misunderstanding of what constitutes qualifying R&D. Sadly, in some cases, it’s due to an aggressive interpretation of what counts as R&D – in blunt terms - the client trying it on. This is often seen in software claims but it’s worth noting that HMRC has its own in-house IT team which passes comment on many software claims. Any attempt to pull the wool over HMRC’s eyes can result in an enquiry! Our vast experience across numerous sectors can quickly identify if qualifying R&D is taking place. Don’t risk it and make a bad judgement!
Claiming expenditure under the SME scheme incorrectly
It’s an easy assumption to make that if your client is firmly in the SME bracket, then any claim can be made entirely under the SME R&D tax relief scheme. However, there are several ‘traps’ which would necessitate certain claims being made under the RDEC scheme (the less generous R&D scheme aimed at large companies). Many advisers are unaware that if a project has been subsidised by either a customer or a grant, or if the SME is being subcontracted to perform R&D by a large company, then the claim is likely to fall under the RDEC scheme. This is a mistake we’ve come across on many occasions.
Making a mess of an RDEC calculation
The majority of R&D claims are made under the SME scheme and despite the growing number of RDEC claims, there still exists an element of confusion about the latter. The RDEC scheme works in a completely different way to the SME when calculating the benefit to the client. RDEC doesn’t give additional relief based on expenditure and instead offers a credit against the corporation tax charge. Even with the assistance of software, many advisers struggle with computing the RDEC calculation. Throw in the fact a company can opt to reflect the credit in the financial statements and you’ve got a perfect recipe for getting in a muddle.
Applying restrictions on certain expenditure types
Several categories of qualifying expenditure have certain restrictions which are often overlooked. There are probably more than you think. The 65% cap on unconnected subcontractor and externally provided worker costs are the most commonly known ones. However, there are also restrictions on connected party subcontractor and EPW costs. These are governed by what HMRC term relevant costs – and they are often ignored. The assumption that costs from other group companies can be included at 100% of cost is a common mistake which we come across when assisting accountants with their claims.