The Most Common Mistakes Companies Make with R&D Tax Credits Revealed
Many companies attempt to make an R&D tax credit claim only to find themselves unsuccessful. There are a number of reasons why this could happen, but without insider knowledge, it can be hard to understand exactly which part of the application process you’ve done wrong. Unfortunately, failing to make a successful claim could be very financially costly to your business, so it’s best to know what to avoid prior to sending your information to HMRC.
In this article, we’re going to take a look at some of the most common mistakes companies make with their R&D tax credit application to hopefully help you avoid making the same mistake.
Mistake 1: Not Keeping Accurate Records
When it comes to R&D tax credits, you can make a claim up to two years after the end of an accounting period. For example, for an accounting period that ended on the 31st December 2017, you have until the 31st December 2019 to file a claim. However, not all companies will keep their records for periods this far back, and this can lead to complications when it comes to filing your application.
It is vital that companies keep accurate records which contain evidence of the work performed on an R&D project. Not only can accurate records help to remind you of what work was completed during a previous accounting period, but they can also serve to substantiate the work completed should HMRC request it. In addition to accounts, you also want to save project planning information, versions of source code, software architecture documentation, technical specifications, weekly production schedules, and CAD drawings and revisions.
The more information you have available, the easier the claims process will be.
Mistake 2: Not Understanding What You Can Claim For
According to GrantTree, one thing that many businesses struggle with is understanding what they can claim for. This is understandable, as it can be difficult, and this is why a lot of companies will hire an R&D tax credits expert to help them with the process. It’s important to understand what is classified as a qualifying expenditure, and what isn’t, prior to making your application. These useful tricks on the GrantTree website will help.
Most companies will want to claim for as much as they can in order to maximise the amount of money they receive. However, incorrectly claiming for things could lead to HMRC raising a red flag about your company, and this could trigger a stressful enquiry, or delay your claim.
Two things you will want to keep in mind are that you need to ensure you are only claiming for expenditures that fall within the set accounting period you are claiming for – not HMRC’s tax year. You also can’t list any directors of your company as subcontractors. Director dividends, therefore, are not classed as a ‘qualifying expenditure’.
Things that you can claim for include consumable items (such as gas and electricity), software licenses, agency workers and subcontractors, and any staff costs such as National Insurance contributions, pension contributions, and salaries.
Mistake 3: Not Reconciling Correctly
There’s nothing that will draw a bigger red flag with HMRC than numbers not adding up correctly. So, unless you want to have your claim rejected, or have to deal with an enquiry, it’s vital that you double, and then triple, check your figures to ensure that everything adds up, and that HMRC can clearly see and understand what you are claiming for.
All of the calculations that you make should be reconciled so that they match your CT600, your tax computations, and your P&L. If you are claiming £100,000 as a subcontractor expense, but only £40,000 has been recorded in your P&L, you can expect to have HMRC on your back. The same goes for every type of expense you record, so make sure to go through everything with a fine tooth-comb and ensure it’s accurate.
Mistake 4: Not Factoring in Grant Funding
Not all companies are aware that grant funding could affect their R&D tax credit claim. Determining whether or not it will all depends on the type of grant received, and how the grant contributed to the project you’re claiming for. The answers to these questions will ultimately determine whether you can claim for R&D funding, and the kinds of expenses that you can claim for.
This again can be complicated, but some businesses are fully able to take advantage of both grant funding and R&D tax credits. It’s worth speaking to an expert about where your company stands if it has received a grant.
Mistake 5: Not Consulting with an R&D Tax Credit Expert
As we mentioned above, a lot of companies find dealing with tax credits hard work. Even if you personally understand everything that you need to do, the process can be incredibly monotonous, and it can be easy to lose track of what you are doing and make simple mistakes. Unfortunately, these small mistakes can lead to large delays and financial costs, so unless you have the time and the knowledge to file your claim properly, it could be worth hiring an R&D tax credit expert to handle the process for you.
There are a number of companies in the UK who have the experience and specialist knowledge needed to file an R&D tax credit claim. Finding one to help you can ensure that your claim not only meets the guidelines as set out by HMRC, but also that it’s maximised, providing you with the highest level of compensation. Of course, some accounting firms do also offer this service, but the majority do not have the specialised knowledge required. If you’re unsure about your accountant, hiring an expert is the way to go.
Making a claim for R&D tax credits is almost always in your business’s best interests if it has qualifying expenses. However, as the process is quite involved, speaking to an expert is usually the best way to go. If this article has helped you, let us know in the comments.
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