Recently, while reviewing some R&D industry statistics, we came across a quote from HMRC saying that less than 10% of the eligible UK companies apply for R&D tax credits. R&D tax credits are an incredibly valuable source of funding for UK-based small companies, getting back up to 33% of R&D project costs. The main reason for this, according to HMRC, is the lack of awareness regarding the scheme.

From our experience, another reason that affects SMEs and prevents them from reclaiming what they’re entitled to is misinformation. SME owners and executives are often tripped up by non-facts about the scheme that make it seem more difficult than it is. To help clear it up a little bit for all of you innovative SMEs out there, we’ve decided to go through the 5 myths we most often hear about R&D tax credits.

Myth #1: The payoff isn’t worth the hassle

This one often comes from accountants who remember R&D tax relief from its early days over a decade ago. Back then, complex legal rules coupled with modest relief rates put potential claimants off – with good reason.

In the time since, the scheme has been continually changing for the better. The last change, in April 2014, meant that SMEs can claim back up to 33% of their eligible R&D costs resulting in payable tax credits, a tax refund or a reduction in corporation tax. And while the scheme fills a whopping 227-page manual, it has been simplified and we hear HMRC are planning further improvements to be introduced soon.

Myth #2: I don’t do R&D

An oft-misconstrued term, “R&D” seems to confuse and drive away many eligible companies. In their official guide, HMRC define R&D as an advance in science and technology through the resolution of scientific or technological uncertainty. You’ll be excused if lab coats and mice wrapped in wires come to mind!

In practice, however, this means that any bespoke (remember the word!) product, process, solution or technology a company has developed could be eligible for R&D tax credits. We’ve worked with businesses ranging from a video games studio to a cheese producer to a florist.

Myth #3: Pre-revenue and pre-trading companies are not eligible for R&D tax credits

HMRC recognises that young companies often go through an “if you build it, they will come” period of experimentation, that encompasses many false starts and dead ends where a company may be spending on development with no customers or revenue to speak of. The good news is that once trading begins, all of this pre-trading expenditure can be included into R&D tax claims. Somewhat ironically, a big trading loss could give the company a significantly better ROI from R&D relief than a break-even scenario – a fact that should encourage early-stage innovative businesses to invest more in their early projects!

Myth #4: I outsource all development so I don’t qualify for R&D relief

Unlike most government grants, the R&D tax credits scheme puts no restrictions on where the actual R&D takes place. Say a UK company contracted a Moldova-based software development agency to create their e-commerce platform while another UK company set up its own branch in Moldova to hire engineers cost-effectively. Both companies can then claim a percentage of the outsourced costs towards R&D tax credits as long as these costs were expensed through the UK companies’ profit and loss.

Myth #5: A formal query will jeopardise my relationship with HMRC

First off, don’t confuse a HMRC query with a tax fraud investigation. Although some R&D specialists would have you believe otherwise, HMRC queries tend to be quite benign (with the caveat, of course, that nothing illegitimate has been done to puff up the claim size or to hide disqualifying factors.) HMRC queries mean that the officers need more information to process the claim. Any unusual patterns might prompt the Revenue to want to verify the facts – but that’s not necessarily a cause for concern. For example, a one-year-old tech startup with no people on payroll claiming £500k in cash might flag HMRC as an outlier. Yet if that same startup just spent £2 million of its Series A investment on R&D, then its “unusual” behaviour is actually is not only legit but rather enviable and the company likely has nothing to fear.

So, there you have it – 5 common myths about R&D tax credits that you’ll hopefully never fall prey to. Have any of these tripped you up? Have you heard of any others that we’ve missed? Get in touch with us in the comments or via email at and let us know!

Posted in Research & Development, Tax rebates.