You are working in the creative industries
If you are producing video games, films, high-end TV or theatre shows, you should explore the HMRC’s suite of creative reliefs. 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.
You have applied for a grant
Some grants are referred to as ‘notified state aid’. This is an EU classification, and if a grant is given this status, it will normally prevent R&D tax credits being claimed by the recipient company on any expenditure relating to the project. Because grants are applied for in advance, and R&D tax credits are claimed retrospectively, the prior use of a grant may rule out R&D tax credits further down the line. This could be good or bad, depending on the circumstances.
For instance, a grant, even if the value was lower than what could have been claimed under the R&D tax credit scheme, could be more useful to the business because it provided necessary cash flow at the beginning of a project. The R&D tax credit (claimed retrospectively) cannot be claimed until your accounts and tax return for the period are filed, potentially up to 12 months after the end of the period. As with the creative industries, if grants are involved it is best to speak to a professional adviser. Preferably at the beginning of a project so your situation can be properly evaluated before decisions are made. You cannot pay back a grant in order to access R&D tax credits at a later date.
Read more about the interaction between grants and R&D tax credits.
Your innovation is non-qualifying
Some activities, no matter how innovative they are, do not qualify for R&D tax credits. These include:
- The social sciences – for example, psychological studies and surveys on attitudes to a product or service. These may, however, go on to inform other activity that would qualify for R&D tax relief (for example a project to develop data analytics software).
- Business processes – improvements to the way that your business is run that relate solely to people or cost management rather than technological innovation.
- Marketing – That successful marketing campaign you ran? That doesn’t qualify, although some of the technological projects underpinning it may do.
Your organisational structure is not right
The simple answer is, if you are a UK limited company you can claim; if you are not, you cannot!
So, academic institutions, charities, partnerships are all excluded from the R&D tax credit scheme.
Where it can get more complicated is 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.
Your innovation occurred more than three years’ ago
This one could smart a little if it affects you! You did some fantastically innovative work four years’ ago. At the time you were loss making and didn’t give corporation tax a second thought. Now your product is established and the profits are rolling in… and so are the tax bills!
You discover R&D tax credits, but at the same time that they can only be claimed retrospectively for two accounting periods (that’s just under three years at the most). Had you taken action back then you could be £100,000 better off today, but now it is too late.
You are not paying any salaries
Hot start-up with a great idea. Three directors are working furiously on product development but are drawing no money from the company, or maybe taking a nominal salary and dividends. It may be pure R&D that is going on, but without significant qualifying costs (i.e. salaries) there can be no significant R&D tax credit claim.
You have vast tax losses accumulated but are now making a small profit
This is perhaps a niche situation, but one worth outlining.
You have £1 million of losses to carry forward and then turn modestly profitable, say £20,000 in a year. You also do R&D and make a claim which reduces that nominal profit to nil. The end situation of making the claim would not justify the resource of pursuing it. In neither circumstance would you pay any tax, so the impact of the tax credit would be the difference between retaining £1 million of losses to carry forward or having £980k – a drop in the ocean.
When R&D tax credits are the answer
We have outlined seven scenarios here where R&D tax credits either are not available to you, or are not particularly advantageous. Each of the points we have covered has a flip side though, where R&D tax credits will be the right answer. Many companies do claim, but there are so many more who could do but are letting the tax credit slip through their fingers.
One consistent thread that runs through all of these points is that companies who plan ahead, and seek out expert advice, have an opportunity to structure their business in the most efficient way possible. This could lead to a better bottom line and competitive advantage in the marketplace.
ForrestBrown are here to have those conversations with innovative businesses. If R&D tax credits aren’t right for you for any reason, we will tell you and help you plan for the future. And if they are right, our award-winning team can optimise your claim so that you gain everything your innovation deserves.