All R&D tax relief claims require a reasonable investment of time and energy, especially if you are submitting it yourself. It is incredibly disheartening to wade through all the details of your application, only to be rejected by HMRC at the final hurdle.

You know your project has a “scientific or technological advancement” as its aim. You’ve carefully eked out only the eligible costs. You’ve written your report, ticking off all the requirements. But still your claim was rejected by HMRC. How frustrating. Why?

Some reasons why R&D tax relief claims are rejected

There are several reasons why your claim may not be accepted by HMRC. We have decided to share five that involve slightly more detail.

  1. You are not an incorporated company

R&D tax relief is a Corporation Tax relief, so you have to be paying Corporation Tax in order to be eligible to claim. Sole traders and partnerships are not entitled to claim and may be happy with their non-incorporated status for several legitimate reasons. It’s important to revisit the option of becoming incorporated, with R&D tax relief investment as a key consideration.

A lesser known fact about R&D tax relief: corporations not yet trading can still successfully claim.

Another pitfall to avoid is, basically, shoddy book keeping and accounting. All company costs must be recorded accurately and kept separate to costs to individuals.

  1. Grant funding

Getting grant funding investment does not just disqualify you from claiming R&D tax relief. But this is an easy area to get wrong and subsequently fail your application. This is about state aided grant funding and you need to be aware of all the intricacies of these regulations. Basically, it is likely that you will have to use the RDEC scheme, rather than the R&D Tax Credits scheme. It doesn’t matter if your turnover and number of employees fits the R&D Tax Credits scheme eligibility criteria.

Companies that have a large number of subcontractor companies involved often want to avoid this because their costs are not eligible within the RDEC scheme.

Businesses need to carefully analyse the best way investment for them. Which is worth more to you: the amount of grant funding, or R&D Tax Credits? How does this change as you plan for the next few years? You have to do the maths and apply for whichever works best for you.

  1. Correct subcontractor invoicing

While we’re talking about subcontractors, you need to be able to show that they are an actual cost. So any smart deals, such as a discount on future work, cannot form part of your R&D tax relief costs. May save money on the one hand, but it negatively impacts the amount you can claim for. Including subcontractor time that is not a direct cost on your R&D tax relief application may result in its failure because it is not eligible.

  1. Not taking a salary

It’s very common for people not to take a salary out of their business, particularly at the beginning of an R&D project. In some ways, it’s a good idea. But it could be a much better idea to pay yourself a salary, as this can increase your R&D tax relief payment in the long term. Dividends do not qualify in either scheme and the PAYE cap for loss making companies comes into effect in April 2020. Obviously, you need to work out what’s best for your own position.

  1. Not using the correct accounting treatment

Tangible Asset and capitalised expenditure must not go into your R&D tax relief claim. Only specific revenue expenses that are outgoings during the allowed time period are eligible for inclusion in your R&D tax relief claim.

How can avoid R&D tax relief claim rejection?

The easiest way to ensure the success of your claim is to work with an R&D tax relief specialist. You don’t have to abandon your current accountant, we specialise solely in the R&D side of your business. We take you through the whole process, with minimal time and effort needed on your part.

We make sure you apply using the right scheme, with a fully evidenced R&D project and including all the legitimate costs. As well as taking care of all the possible problems mentioned here. Don’t waste your valuable time on uncertainty and give us a call on 0330 0539 112 when you’re ready to make an R&D tax relief claim.

Jamie Smith