Your trusted adviser for R&D Tax Credits, Creative Tax Relief, and R&D Grants
We sat down with one of our resident Corporate Tax Associates for R&D tax claims to discuss where clients are most likely to slip up when calculating their R&D expenditure and the tax relief they are owed.
In an era where innovation drives business growth, particularly in the Information & Communication, Manufacturing, and Professional Services sectors, understanding the intricacies of R&D tax relief has never been more crucial. With an increase in HMRC scrutiny leading to a 23% decline in SME claims, getting your cost calculations right is more important than ever.
We sat down with Rabia Mohammad, one of our Corporate Tax Associates specialising in R&D tax claims, to discuss the common pitfalls companies face when calculating their R&D expenditure. With ACCA and ATT qualifications and extensive experience helping both SMEs and large enterprises optimise their claims, Rabia offers invaluable insights for CFOs, Financial Directors and R&D Managers looking to maximise their tax relief.
Rabia: One of the trickiest areas for claimants is the distinction between the different categories of costs. UK companies can claim for:
This is an exhaustive list. Categories not listed here cannot be claimed. We sometimes see companies attempting to include rent, patent costs, or capital expenditure. These are not eligible costs and may trigger a compliance check from HMRC, if included.
A recurring issue, especially for scaling companies, is the distinction between externally provided workers (EPWs) and subcontractors. This is crucial for growing companies that need extra resources for their R&D projects.
Understanding which projects and costs qualify for R&D tax relief can be challenging, especially with HMRC’s increased scrutiny. Our free resources can simplify this process:
Download Both Tools for Free and take the guesswork out of your R&D tax relief claims.
Rabia: Absolutely. Subcontractors are third party companies who are contracted to carry out an activity for the claimant. For example, a manufacturing company developing a new piece of machinery might subcontract specialised component testing to a third party.
EPWs (or agency workers) are different - they're essentially staff augmentation. The key difference is that these workers operate under your company's direct supervision. This is common in software development projects where companies need additional developers or engineers but want to maintain project control.
EPW and subcontractor costs can only be included insofar as they are for R&D work and should be apportioned if the work done was only partially R&D.
CFOs and Financial Directors making R&D tax claims need to remember that subcontractors cannot be claimed under RDEC claims (this is relevant for large companies or SMEs that have to claim through the RDEC scheme). However, EPWs can be claimed under both SME and RDEC schemes.
Generally, only 65% of costs can be claimed for unconnected subcontractors and EPWs, but connected party costs can usually be claimed in full.
Rabia: Growth-stage companies scaling their operations will often split their time between R&D and commercialisation. Most organisations aren't purely focused on R&D—they maintain existing products while innovating new ones.
My main advice for Finance Directors and R&D Managers is to get on top of your staff time tracking. You can do this by implementing timesheets with specific R&D codes. For companies using advanced CRM and ERP systems, you can integrate R&D tracking into existing workflows. If you don’t have timesheets in your business, you need to have a robust methodology for estimating R&D time.
We typically recommend claiming no more than 95% of any staff member's time for R&D. This may be even lower for executives and management roles.
For other costs, like software or consumables, you can base these apportionments on the staff apportionments. For example, you can take the total R&D staff costs compared to the total staff costs and use that ratio for other R&D costs.
Rabia: Founders and CEOs, especially in startups and growth-stage companies, will often ask us this. Directors' costs can only be claimed through payroll, which includes:
We’ve seen some claimants attempting to claim directors as subcontractors or including directors’ dividends. Unfortunately, these aren’t eligible and can result in a compliance check if claimed.
Rabia: My main advice is prep, prep, prep! Everything is easier with a strong documentation strategy. Alongside timesheets, keeping track of the R&D work you’re doing as you’re doing it makes preparing a claim much easier.
For early-stage companies focused on growth and innovation, particularly in technology and manufacturing, it’s important to establish your R&D boundaries. You should clearly document when R&D begins. This is when you identify and start to work on overcoming a scientific or technological uncertainty. Equally, when an uncertainty is solved, R&D ends.
Also, it may seem obvious, but only claim for R&D costs within a single accounting period, even if the projects are ongoing.
Finally, make sure to gather and retain all your workings. This is really important in the event of a compliance check. Obviously, we try and avoid them by preparing strongly defended claims, but HMRC’s Mandatory Random Enquiry Programme (MREP) means that any claim is at risk of investigation. Compliance checks are much easier to resolve with clear evidence.
At Myriad, we're not just another tax incentives consultancy. We're the only one that eliminates your risk.
Our promise to you is simple: We stand firmly behind our advice and opinions. If your claim is challenged, we'll defend it free of charge. If your claim is rejected, we won't charge you any fees. We'll cover any HMRC penalties and even compensate you for your time.
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By leveraging our expertise, you can focus on what you do best – innovating and growing your business – while we ensure you receive the maximum R&D tax relief you're entitled to. Whether you're a startup scaling rapidly or an established enterprise looking to optimise your tax strategy, Myriad has the knowledge and experience to support your R&D tax relief needs.
For a detailed discussion about your R&D tax credit opportunities or to explore how we can help optimise your claims, please call 0207 118 6045 or reach out through our Contact Page.
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Please contact us to discuss how working with Myriad can maximise and secure R&D funding opportunities for your business.
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