Tax mistakes can be incredibly expensive, yet quite common. Making matters worse is the fact that businesses make mistakes after investing money in research and development, only to find out that they cannot make a successful claim of tax credit to offset those sunk costs. Here are seven common R&D tax credit mistakes you should avoid at all costs. We’ll also explain how you can avoid making these tax credit mistakes in the future.
Not Making the Tax Credit Claim at All
A common mistake that businesses make is not trying filing the research and development tax credit claim. For example, they think that they don’t qualify because they don’t have a formal lab. However, most research doesn’t take place in a formal lab, and it doesn’t necessarily involve people in lab coats.
Any development activity that seeks to advance technology may count. As long as you have competent professionals and a level of technological uncertainty, you may count. Furthermore, the fact that a business received a government grant linked to research and development may not disqualify them from further tax credits. At least try to make the claim to see if you can reduce your tax bill.
Ignoring the Little Things
Some firms think that their efforts to improve their existing product or processes don’t count as research and development. They may think that their new version of the product or enhanced production methods don’t qualify for the R&D tax credit, though it very well may do. Alternatively, they ignore their small R&D projects that didn’t pan out, though these smaller projects were R&D and the small projects could still add up.
Not Keeping the Necessary Records
You have up to two years after the end of the accounting period to file for the research and development tax credit. However, it is essential to keep records proving the technical work done on each research and development project. These records can make it easier to file a claim for a prior accounting period and prove that the work was done. These documents can include drawings, production schedules, technical specifications, source code and project planning information.
Track all of your expenditures as well, including invoices and receipts. One of the reasons to keep all related records for the project is that it helps you identify all related costs.
Not Claiming All Qualifying Costs
There are several major categories of research and development expenditures that you can include in the associated tax credit claim. The first category is labour costs. This includes salary, pension contributions of employees and payments to contract laborers. A common mistake is only focusing on engineering or scientific staff salaries while ignoring the administrative costs. For example, you can claim the salary of those who were performing feasibility studies, reviewing competing technologies, testing the product or managing your technical employees. Indirect support activities like finance and general administration supporting R&D qualify for the tax credit. This means that the program manager’s salary may be a qualified cost in addition to the salaries of all of your programmers and engineers. The salary of the accountant overseeing all of the R&D expenditures may count, too. Consult with an R&D tax expert to ensure that you include all qualified expenses.
Sometimes the business thinks their research and development costs don’t count because they were part of a project for a bigger client. However, the research and development work you did for another client may be something you can claim. In the worst-case scenario, the claim may be subcontracted to an SME. Conversely, the research and development may transfer to other projects, allowing you to claim far more than you thought would qualify.
Consumable items like light, heat, materials and equipment used in the R&D process are costs you can claim. Software licenses and hardware that you bought to support the R&D project are expenses you can claim. Make sure you claim all qualifying costs to maximise the tax credit you receive.
Not Consulting with the Experts
Many businesses fail to include all qualified expenses because they don’t know how to break down the labour costs for overhead or back office staff. Others don’t know what costs could be included, so they only cover the direct expenses for the lab and not everything else that could also be included in their R&D tax claim.
The solution is to consult with R&D tax credit experts. Their expert advice increases your odds of making a successful claim. If you can’t afford to consult with tax credit experts, you can visit the site for an authoritative guide on research and development tax credits. It will help you determine if you’re eligible, how much you could get back and how to file a claim on your own.
It may be necessary to seek legal advice in other areas, as well. For example, the wording of your contracts and their assignment of property ownership rights can blow your entire research and development tax credit claim. Another mistake is failing to differentiate between subcontracted R&D workers and externally provided workers. This is especially true when there are subcontractor restrictions. Consider the cost of professional legal and accounting advice an investment in your business.
Trying to Claim Expenses that Don’t Qualify
Small and medium sized businesses may pay people in dividends instead of salaries. However, dividends don’t normally qualify for R&D purposes. This means you cannot claim the majority of a technical director’s pay when it is in dividends. Analyse your payment structure. It may be better to pay people associated with R&D salaries instead of other incentives so that you can maximise the associated R&D tax credits.
Acting Based on Old Information
The uplift for contracted R&D used to be limited to 30 percent under the old large scheme. Many of these costs today can be included in a claim under the SME scheme for a 130 percent uplift now. However, your business may only be able to claim 65 percent of the cost of a contractor. Learn what the current tax credit rules are instead of trying to file based on old information.
Research and development tax credits are part of the government’s strategy to incentivise R&D. Follow our tips to maximise the claims that you receive for your R&D activities.