Comment: Avoiding fraudulent R&D tax relief claims

Research and Development (R&D) tax reliefs were created by the government as an incentive to encourage more UK businesses to invest in innovation. With the UK ranking fourth in the 2023 Global Innovation Index - which assesses several areas including creative outputs, trademarks, intangible assets, and market sophistication (credit and finance for start-ups and scale-ups) - innovation is a key driver of the economy.

It applies to businesses that undertake projects that achieve scientific or technological advancement. Luckily for those in the engineering sector, this is likely to include much of the work you do.

What savings can be made?

Businesses that spend money on innovation, including developing new products and improving existing ones, may be able to claim through HMRC to receive either a cash payment for loss-making companies, or a corporation tax reduction for profitable entities. If your limited company qualifies then you can claim an enhanced deduction of up to 86 per cent on qualifying R&D expenditure under the SME scheme.

So, for every £100 spent on qualifying R&D, a business could deduct an additional £86 from related taxable profits which could significantly reduce its corporation tax liability. 

If your business is loss-making and less than 40 per cent of your total expenditure is on qualifying R&D, you can claim 10 per cent of ‘surrendable losses’ back for a cash payment. If R&D expenditure exceeds 40 per cent, then the credit potentially increases to 14.5 per cent.

Who qualifies?

Not all businesses will be eligible for R&D tax reliefs. Typically, businesses meet the requirements if their project:

• Innovated or advanced in a specific field
• Encountered issues during the implementation phase
• Attempted to overcome these issues
• Could not be resolved by an industry professional or existing solution

You can also ask yourself these questions:

• Have you developed your own software?
• Have you developed internal processes that reduce costs and improve production times?
• Has your limited company made advances in science and/or technology?
• Are you in the business of manufacturing goods?
• Are you using existing technologies uniquely?

If you answered yes to any of the above, you may qualify.

How to avoid making an incorrect claim

Almost a quarter of R&D tax relief claims filed are found to be fraudulent by His Majesty’s Revenue and Customs (HMRC). In part, this is from businesses trying to benefit from a tax reduction when they know they don’t qualify. But on the other end, businesses may also innocently file incorrect or ineligible R&D tax relief claims. This is because the process of filing an R&D tax relief claim is complicated. Not only this, but if done incorrectly it could land you in hot water with HMRC and a large fine. It could even trigger a full tax investigation, which can be a lengthy, potentially stressful, and costly process.

The reason for the complicated nature of filing an R&D tax relief claim is the UK’s tax code itself. Our tax legislation is the longest in the world. Spanning 10 million words, it’s so long that it’s more words than the average human will read in their entire lifetime. This means that it’s incredibly complex, with layers upon layers of rules and regulations.

To avoid a fine, the safest thing to do is to always consult a professional accountant who will be able to assess accurately whether your business is eligible. And, most importantly, they will be able to submit correctly all the relevant paperwork on your behalf to ensure you receive the tax relief you deserve without any hassle from HMRC.

Tom Biggs is Associate at Wellers Accountants, which specialises in services for SMEs. You can  find out more about the R&D tax credit here.