Navigating the complexities of R&D tax credits can feel overwhelming. Whether you’re a small business owner or part of a larger corporation, understanding the rules and restrictions is key to making sure your claim is accurate and increases your potential benefits.
This article breaks down the key R&D tax credit restrictions to make the process clearer. Find out what you can’t claim, how to check if you’re eligible, and how to steer clear of common mistakes.
What are the key restrictions for R&D tax credits?
R&D tax credits are a valuable incentive, but they come with specific rules to make sure claims are fair and accurate. These restrictions are designed to define what qualifies as R&D activities and who is eligible to claim. For example, certain limits apply to businesses using subcontractors or externally provided workers (EPWs), as well as rules around the PAYE and national insurance (NIC) cap.
It’s also important to consider how accounting periods and claim timing impact eligibility. Some projects may straddle multiple financial years, which can complicate the process.
By knowing the framework, you’ll be better prepared to identify opportunities within your R&D projects while staying compliant with HMRC guidelines.
Expenses excluded from R&D tax relief
Certain costs simply don’t qualify for R&D tax relief, and including them in your claim can lead to unnecessary delays or even rejection. To help you avoid these issues, we’ve outlined the key categories of expenses that are excluded from tax credits.
Costs associated with bringing a product to market
Expenses tied to advertising, promotional activities, or other market-focused efforts are not eligible. For example, costs related to product launch campaigns or packaging design are excluded as they focus on commercialisation rather than innovation.
Production and distribution costs
Manufacturing and delivery expenses, such as packaging, shipping, or general production, cannot be included in an R&D tax relief claim. Remember, even prototype production for testing is excluded unless it’s solely for R&D purposes.
Land and property expenditure
The purchase, leasing, or improvement of land or property is not allowable. While these costs might support operational needs, they do not directly contribute to eligible R&D activities.
However, you may be able to explore capital allowances for certain property investments outside of R&D tax relief.
Patents and intellectual property
Costs incurred to secure patents (including patent attorney fees), trademarks, or other intellectual property rights do not qualify. These are treated as legal and administrative expenses rather than R&D investments.
Capital expenditure on physical assets
While vital for many businesses, spending on physical items like machinery, equipment, or buildings is excluded. Only specific consumables or software used directly in R&D projects may be eligible.
Staff training costs
Expenses for employee training, even if related to the use of new technologies or systems, are not eligible unless the training directly involves R&D activities. Training specifically aimed at experimental or innovative work may be considered if it’s integral to the project.
Entertainment and hospitality
Costs for entertaining staff or clients, such as meals, events, or other forms of hospitality, cannot be included. These expenses, even if linked to your R&D project, are categorised as business entertainment rather than R&D expenditure.
Eligibility: how to determine if you can claim
Determining eligibility for R&D tax relief can be challenging, especially with the introduction of rules like the PAYE NIC cap. To qualify, your project must aim to advance a field of science or technology by resolving scientific or technological uncertainties that couldn’t easily be solved by a professional in the field. It’s not enough for your work to improve existing products or services, it must involve genuine innovation.
Key eligibility checks include
- R&D activities must relate directly to your business’s trade, whether ongoing or planned.
- Only qualifying R&D expenditure is claimable, such as employee salaries, subcontractor costs, or materials used directly in the project.
- Claims must align with your accounting periods, ensuring expenses are reported in the correct financial year.
Keep in mind that claims for subcontracted R&D or work involving externally provided workers (EPWs) must meet additional criteria. The SME scheme also has specific thresholds for total pay and PAYE and national insurance contributions. Ensuring your figures are accurate and compliant is critical for successful claims.
How Ayming can help you navigate R&D tax credits
At Ayming, we specialise in simplifying the complexities of R&D tax relief, helping businesses understand R&D tax credit restrictions, identify qualifying projects, avoid common pitfalls, and optimise their claim process.
With years of experience and a proven track record, we take the uncertainty out of the process, so you can focus on what matters most – innovating and growing your business.
Explore our R&D Tax Resource Hub to get the answers you need and access expert support.