The permanent R&D tax credit applies to companies researching, exploring, designing, developing, and improvising products, methods, techniques, technology, equipment, formulas, or software.
The main aim of the R&D tax credit is to incentivise innovative companies.
The finance field is considered a straightforward and calculative domain, yet analogous to all the other fields. There are some misconceptions among people new to finance.
Nowadays, R&D tax planning has become an essential backbone for developing companies. It focuses on accelerating activities that intend to boost the product development cycle with the help of research and development. Still, many companies are unaware of the R&D tax credit or don’t know how to calculate the R&D tax credit.
One of the best facts about the R&D tax credit is that even if the research and development initiative fails and the companies suffer a loss for the year, you can still claim it.
Even though the R&D tax credit benefits are pretty transparent, several reasons and misconceptions still keep companies from claiming the R&D tax credit.
We have condensed the common misconceptions into five critical points.
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Table of contents
5 Common Misconceptions about the R&D Tax Credit
1. The R&D tax credit won’t boost cash flow or profits
In contrast to any other tax deduction, the R&D tax credit is a sort of £-for-£ credit. R&D tax credit eventually boosts a company’s cash flow as it increases liquidity and ensures more cash is in its bank account.
If the cash flow of the companies increases, there will be more business activities, which would ultimately contribute to the company’s profit. And, if any of the research and development initiatives are successful, the company’s profit can multiply exponentially yearly.
Therefore, thinking that the R&D tax credit won’t increase the company’s profit is entirely a myth. In reality, it is just vice versa.
2. The firm is not building a new product or service
Many companies have a conventional product, and their entire business is based on that. For example, certain companies make only one kind of soft drink.
Even if they are investing in research and development, it is to optimise the production method of that particular drink only. They are not launching any new products in the market. Still, they are simplifying the production technique to reduce production costs and generate higher revenue.
The business owners assume that since they are not building any new product or service, they are not eligible for the R&D tax credit.
It is a myth as the research and development class tax credit can be claimed by any company that has taken the initiative in the field of research and development to optimise their technique, technology, product, service, equipment, composition and so on.
No matter whether the product is a pre-existing product or the product is to be launched in the market. You are eligible to claim the research and development tax credit.
If you have any ambiguity about your eligibility, you can consult a research and development tax expert for clarity or read government guidelines and see where you stand in terms of eligibility.
3. The employees are not from a technical or scientific background:
Don’t assume you are ineligible to claim the R&D tax credits since your employees are not engineers or scientifically sound.
An employee’s qualification is not essential when assessing the qualifying costs; experience does count.
Research does not require any standardisation or degree; it just requires keen interest and knowledge in the subject. Therefore, even if your employees have minimal education, you can claim the research and development tax credit if they are working on any initiative related to development and innovation.
Suppose you feel that your in-house employees are not that interested in innovation and research. In that case, you can hire third-party service providers to carry out research and development activities for your firm. Even the research and development activities carried out by third-party individuals qualify for the research and development tax credit.
If a third party is based overseas, 65% of the costs are eligible.
4. The R&D initiative should have been successful to make the claim:
Initiatives related to research and development are a always uncertain. There can be scenarios where the research and development activities yield no fruitful results, even though a lot of time and money has been spent on them.
No matter the process’s end results, you can claim the incentive.
In fact, you can claim the incentive even if your business ends up in a loss. R&d tax benefit is all about the journey of a business on the path of innovation. You are not required to submit a successful project to get the incentive.
The efforts and creativity undertaken to optimise the production cycle or any technological advance are appreciated and rewarded, whether a success or a failure.
5. Applying for the R&D tax credit is an expensive and time-consuming affair:
There was a time when the R&D tax credit was new to the market, and only a few people were aware of it. But, things have changed drastically now. The R&D tax credit has been completely embedded in the field of finance.
Always seek a professional to complete your claim and submit a technical report to HMRC.
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Summing up
The UK’s R&D tax credits framework is one of the most successful globally.
The R&D tax credit is a government-backed scheme that rewards innovation and technological advancement. Companies can file an R&D tax claim for the costs of R&D activities in that accounting period.
If your business is engaged in innovating a product or process, then it can also be eligible to claim R&D tax credits.
And you know! This scheme is not just limited to the technology sector. Any mistake in this process can end up with an HMRC inquiry or refusal of the claim; you do not want this – it sucks! Hopefully, with the right guidance, you can get it right every time.
