R&D tax relief can only be claimed by companies which are liable to UK Corporation Tax. This rules out some businesses and aligns with the intent to incentivise R&D investment in commercial businesses.
There are other organisations / companies that can only claim in certain scenarios. In this article, we go into more detail about who can’t claim R&D tax relief and the other incentives that might be available to support innovation.
Limited liability partnerships (LLPs)
Limited Liability Partnerships (LLPs) do not pay UK Corporation Tax and as a result they usually cannot claim R&D tax credits.
When LLPs can qualify for R&D tax credits
If your partnership has a corporate partner, that corporate partner will be subject to Corporation Tax on its share of profits from the partnership. You therefore may be able to benefit from R&D tax credits for R&D activities carried out by the partnership, in proportion to your partner profit share.
Other available incentives:
Grants – if the LLP’s activities are firmly rooted in the UK, it may be eligible for a grant. For example, Innovate UK requires applicants to be a UK business entity, but this does not require it to be a limited company. Browse the latest grant funding opportunies.
Capital allowances – depending on the structure of the LLP, the interaction with capital allowances and what is available will differ. Where large sums are at stake, it is important to take advice to ensure you are getting the position right. View our capital allowances services.
Patent Box relief – similar to R&D, an LLP cannot claim Patent Box, however, a corporate partner may be eligible subject to meeting the requirements to claim. Unlock the full value of your IP with Patent Box.
Can sole traders claim R&D tax credits?
Sole traders do not pay UK Corporation Tax, so they cannot claim R&D tax credits under any circumstances.
Other available incentives:
Grants – if the sole trader’s activities are firmly rooted in the UK, it may be eligible for a grant. For example, Innovate UK requires the applicant to be a UK business entity, but this does not require a limited company.
Capital allowances – sole traders are entitled to claim capital allowances. These differ in some instances to those available to limited companies. Being aware of the differences and how to apply them is important to your tax compliance.
Can universities / academic institutes / research institutes claim R&D tax relief?
Universities and other academic institutions can’t claim R&D tax relief.
When can universities claim?
Spin-out companies used by universities to commercialise their research are able to claim R&D tax relief.
Other available incentives
Since they are a limited company, a range of innovation incentives are available to university spin-outs. These include Patent Box, grants and capital allowances.
Can charities claim R&D tax relief?
Charities and not-for-profits are not eligible to claim R&D tax relief. This has been the case since 2015.
When charities can qualify for R&D tax credits
A charity may establish a trading subsidiary for activities outside of its primary-purpose trading activity. Due to a trading subsidiary being subject to normal corporation tax principles and therefore not benefiting from charitable tax exemptions, it may be eligible to make an R&D claim. The same rules for any company seeking to make an R&D claim apply to the trading subsidiary.
It is common for a trading subsidiary to reduce any corporation tax liability to nil through a gift aid donation, an R&D claim can help to reduce the amount required and/or generate a payable credit for the company.
There are numerous factors to consider, and it is important to be properly advised on how to approach the interaction of an R&D claim with wider group tax planning decisions.
Other available incentives:
Since trading subsidiaries of charities are likely to be limited companies, they can be eligible for other innovation incentives, including Patent Box, grants and capital allowances.
Can you claim R&D tax relief for social sciences?
Social science-based research doesn’t qualify for R&D tax relief. Both the DSIT Guidelines and HMRC rules are explicit that only science and technological activities are eligible. This encompasses work in the arts, humanities and social sciences (including economics), all of which are deemed to not qualify for the purpose of R&D tax reliefs.
Can creative industries claim R&D tax relief?
Although you can claim R&D tax if you work in the creative industries, it is not always recommended. Even if what you are doing would qualify for R&D tax credits, the creative reliefs offer industry-specific tax advantages that may be more appropriate for you.
Sometimes a combination of R&D tax relief and, say, video game relief may be the best route forward; but you cannot claim for both on the same expenditure. It is best to seek professional advice so you can plan properly.
Find out more about R&D tax relief and creative industries.
Other available incentives:
If you are producing video games, films, high-end TV or theatre shows, you should explore HMRC’s suite of creative reliefs.
Types of business where legitimate R&D tax claims are rare
HMRC provides information on the types of claim which are rarely eligible. This includes those from the following types of businesses:
- care homes
- childcare providers
- personal trainers
- wholesalers and retailers
- pubs and restaurants
Group and subsidiary companies and R&D tax claims
Eligibility to claim R&D gets more complicated when it comes to group structures. Thought should go into which company in your group is doing the R&D.
If company A within your group is carrying out the R&D and that is based on mainland Europe, then the expenditure is not going to qualify. Or if Company B is responsible for the R&D work, but key personnel are actually employed by Company C, then again you can run into trouble if the costs aren’t located in the right entity.
If you are going to be innovating and you are a member of a group, take professional advice on your organisational structure before commencing the work. Group structure can also affect the benefit of your claim – you may be treated as a large company without realising it.
Restrictions on subcontractors and externally provided workers
There are restrictions on subcontractors and externally provided workers (EPWs).
See our article on EPWs more information on the difference between a subcontractor and an EPW.
Supporting innovation through other incentives
When R&D tax credits shouldn’t or can’t be claimed, there may be other options for innovative organisations. At ForrestBrown, we can appraise your funding strategy and advise on your eligibility for a range of innovation incentives including grants, Patent Box and capital allowances.
We can also advise on location strategy, helping international businesses assess the best areas to invest, based on connectivity, the availability of skilled workers and negotiated incentives.
Need advice on qualifying criteria?
If you’re an LLP, charity, university, academic institute or research organisation beginning your funding journey, we’d love to hear from you. Get in touch to discuss your eligibility for innovation incentives.