4 reasons HMRC might reject your R&D tax relief claim

Preparing your R&D tax credit claim requires a significant amount of effort, attention to what HMRC is looking for and attention to detail to make sure all of your numbers line up. You’re just as likely to not claim enough tax credits as you are to claim too much so it’s important to get it all right. Often, an R&D tax consultant can help make the grey areas clear, find more costs that are eligible for cash back or tax relief and help your claim get processed smoothly and on time. 

Despite best efforts, your R&D tax credit claim can still get rejected or queried. Common reasons why HMRC may reject or query your R&D tax relief claim include:

  1. You’re claiming more costs than your annual accounts show
  2. You’re claiming non-eligible R&D costs
  3. You have received grant funding or state aid that isn’t correctly accounted for in the claim
  4. People you are claiming haven’t drawn a salary

1. You’re claiming more costs than your annual accounts show

It’s important you keep good accounting records of your R&D costs. Often companies will show fewer R&D costs on their annual accounts than actually incurred so it will appear as if they are overclaiming. This is a red flag with HMRC and is highly likely to open up a query into your claim. Doing the opposite and showing more costs in your annual accounts but too few in your R&D claim won’t cause a HMRC query but will mean you’re claiming back less than you should be. Make sure to keep good accounting records to prevent any of these issues.

2. You’re claiming non-eligible R&D costs

It’s common that people interpret R&D eligible costs in different ways but HMRC have a specific outline on costs that can and can’t qualify. An example of this might be hosting costs; you could have servers solely dedicated to R&D and therefore want to include it but HMRC do not consider this a qualifying cost. If HMRC see you’ve included hosting costs they will likely query your entire claim so make sure you only include costs that are eligible for the scheme. (Note, hosting costs are set to fall into the eligible expenditure bracket in the future but currently can’t be claimed on.)

3. You have previously received grant funding or state aid

If you have previously received grant funding for your business, you will not be eligible to claim R&D tax credits for this funding under the SME scheme. This is true regardless of your company's size or assets, or turnover. This means you'll likely have to file an R&D tax credit claim under the RDEC scheme for this expenditure, which is less generous. Businesses must therefore carefully weigh the benefits and drawbacks of grant funding in terms of R&D Tax Credits. Your claim for R&D tax credits under the SME scheme may be denied if you use grant funding or state aid. As a result, even if you qualify as an SME, you must apply under the RDEC scheme.

4. Not drawing a salary

Often early stage businesses will have little funds to pay for development so the team may work for equity. Unfortunately, you can’t claim on time or equity and you’ll have to actually make a payment before you can claim it back. This also means that if you intend to pay someone at a future date, you have to make the payment before you file an R&D claim for this cost. Dividends are also ineligible for R&D claims, so you might be better off taking some money out of salary to boost your claim. This is especially important when the PAYE cap on R&D tax credits has been incorporated.

How can you avoid having your R&D tax relief claim denied?

There are many R&D tax relief claims that HMRC receives and they clearly won’t entertain claims that have incomplete or unnecessary information. Your R&D incentive claims should be meticulously prepared, with all required details correctly included in a report. It is best to seek advice from R&D tax credit experts who have a track record of successfully claiming R&D tax credits. F6S has a 100% success rate in R&D tax credit claims, and we'd be happy to assist your business as well.

If you have any additional questions about R&D tax credits, please see our FAQs page, which will help you in better understanding the R&D tax credit system.

December 17, 2021
F6S can help you with your R&D Claim