“Myth:  (1) A traditional story, especially one covering the early history of a people or explaining a natural/social phenomenon [like the ancient Greek myth of Ikaros, pictured here, who attempted to fly...].  (2) widely held but false belief.”[1] 

R&D Tax Credits have been around for quite some time, yet many early stage / start-up entrepreneurs seem to be only vaguely familiar with them, shying away from taking the time to consider the scheme.This lack of enthusiasm appears to stem from “widely held but false beliefs”, such as:

a) that the credits are only for larger, established companies with their own separate R&D departments;

b) that start-ups experience losses in their first years of trading, and as such, there is no need to apply for Tax Credits;

c) that the claiming process will be too much of a hassle for what it would be worth;

As these myths are preventing companies from optimising governmental incentives (and essentially losing out on money), I am going to try to dispel them.

R&D Tax Credits are available to any UK company that is trying to make "an advancement in either science or technology".  We aren’t talking about disruptor products; we are talking about advancements. 

The scheme’s name can indeed mislead entrepreneurs into assuming that it is about claiming for a tax credit to offset taxable income.  In reality, it is so much more than that, and for many start-ups with loss making first years, HMRC can offer cash back to the company upon making the claim on their first years’ tax returns.

For most companies, the claiming process is straightforward, and has become even more “user friendly” since last years’ introduction of the advance assurance offering where HMRC pre-approves the claim ahead of the time of filing.

 To further dispel the myths, listed below are the top five frequently asked questions I have been getting on the subject.  (Please note that I have tried to keep my answers succinct, and thus may not delve into the topics too deeply.)

1.  How do I calculate the potential credit that I could be eligible to receive?

The potential credit and / or cash claim that a company can receive depends on which program they will be eligible for. There is the SME program for very early stage start-up companies that need to meet certain conditions in order to qualify.  Then there is the RDEC scheme for larger companies and any early stage companies that do not qualify for the SME scheme. 

It is best to speak to an advisor (such as us here at Sapphire) to assess which program your company is eligible for and to go through the calculations specific to your company's situation as there are a lot of exceptions and other stipulations. 

2.  What is the process I need to follow in order to claim the R&D tax credit?

The first step is to prepare an advance assurance application to HMRC, if the company is eligible.  (Companies above a certain size are not allowed to apply for the advance assurance).  The appropriate supporting paperwork is gathered, and the claim is made and submitted as part of the company’s tax return.

3.  What type of costs are eligible to be included in the R&D tax credit calculation?

Eligible costs are what HMRC deems to be “qualifying expenditure” and those costs form the basis of the credit’s calculation.  It is expenditure used directly in the research and development process.  Qualifying expenditure may be costs related to materials used directly in the R&D stage, salaries of people involved with the R&D projects, and/or any overheads directly attributed to the R&D process such as utilities or rent for R&D premises.  There are stipulations and exceptions so it is best to go over the costs with your financial advisor to ensure you are including the appropriate costs.

4. How does obtaining advance assurance for R&D Tax Credits benefit my company?

Advance assurance offers the ability to confirm with HMRC the company’s eligibility to claim, as well as a check that the expenditure to be claimed qualifies.  The advance assurance eliminates queries and resulting unnecessary delays from HMRC for a period of up to three years.

5. What do I need to provide to HMRC to apply for the R&D tax credit?

Supporting documentation to prove the qualifying expenditure that is included in the calculation has been incurred.  Additionally, it may also be prudent to include any governmental grant contracts to ensure that the State Aid rules are being upheld.

I appreciate the very "high level" nature of my answers to these questions, so if you seek further assistance in understanding the R&D Tax Credit scheme, or if I can assist you in claiming please feel free to contact me, I would be very happy to help (see our R&D services page here).

[1] Google definition of the word “myth”