Claim R&D tax credit on a failed project

A common misconception among businesses looking to claim R&D tax credits is that they can only claim for successful projects. Not so! In truth, unsuccessful R&D projects can be claimed in much the same way as successful ones. The reason for this is that HMRC wants to encourage innovative behaviour within UK firms.

HMRC are also understanding of the inherent risk versus reward that comes with R&D work. Often small and medium sized companies are put off from conducting R&D work because of potential losses. However, with R&D tax credits available on all projects regardless of their success, the reward is always worth the risk.

How to recognise a failed project

Guidelines on the meaning of R&D for tax purposes are outlined by the Department for Business, Innovation and Skills. Here is what they have to say about unsuccessful projects:

‘Not all projects succeed in their aims. What counts is whether there is an intention to achieve an advance in science or technology, not whether ultimately the associated scientific or technological uncertainty is completely resolved, or resolved to the degree intended. Scientific or technological planning activities associated with projects which are not taken forward (e.g. because of insurmountable technical or commercial challenges) are still R&D.’

The takeaway? R&D is a process. For the purposes of R&D tax credits, it only matters that the process took place, not whether it was successful. Here are some examples which will hopefully sound familiar:

  • Your client’s project might only partly solve the uncertainty.
  • They develop a prototype that doesn’t fulfill its intended function.
  • Their new tool developed during the project is just as efficient as the old one.
  • A new experimental process intended to reduce costs or time is instead more costly and time-consuming.

All of these circumstances indicate a failed R&D project or at least that it has been unsuccessful. What is important is that there is an intention within the R&D work to better the field, along with the evidence to show this.

Read more about the four ways to find out whether your client’s project qualifies for R&D tax credit.

How to claim R&D tax credit on a failed project

The process of claiming R&D tax credits on failed projects is just the same as claiming for successful ones. This is because the benefit from R&D tax credits is always calculated using your client’s R&D expenditure. HMRC is not concerned about the profits generated by R&D. This is reflected by the fact that R&D tax credits are also eligible for loss-making companies. So even if your client goes into the red due to their R&D efforts, successful or not, they can still balance the books by claiming R&D tax credit.

There are two requirements in order for your client to claim on an unsuccessful project:

  • They must be a UK company that pays UK Corporation Tax.
  • They must be conducting work that conducts R&D in the form of an innovative product, service or operation. This includes an intention to conduct R&D work.

The key is for your client to prove that they took the necessary steps in conducting R&D. This occurs during the technical report step of an R&D tax credit application. This phase allows your client to provide supporting evidence on the projects within their claim.

Your client should also be aware that they can claim R&D tax credit on any work done two years after their most recent accounting period. This time frame for claiming R&D tax credits means your client may already have unsuccessful projects waiting to be included in a claim.

You can read about all the types of work that qualify as R&D here.

Benefits of claiming on a failed R&D project

As mentioned previously, R&D can be very costly to undertake. As a result, businesses often see the prospect of R&D as one that is too risky. However, if your client claims R&D tax credits for their failed projects this can offset their losses. The amount they can recoup is directly proportional to the total qualifying R&D expenditure within their project. This is due to the fact that R&D tax credits are calculated as a percentage of R&D costs.

The benefits of claiming R&D tax credits on unsuccessful projects go beyond the financial ones though. A problem within a certain field may take multiple R&D projects to be solved. In fact, it is usually the culmination of work over many years that brings about groundbreaking innovations. As such, having the confidence to start to engage in R&D work increases your client’s likelihood of a real breakthrough. Trial and error is almost always a part of overcoming a technical or scientific uncertainty. That’s why R&D tax credits are there to help your client progress towards achieving success.

How made.simplr can help

The difficulty in an R&D tax credit claim comes from identifying what your client can and can’t claim for, as well as sourcing evidence of their R&D. All of the above are made simpler with the use of our online tax credit portal software. There’s a reason for the name after all! With us, your client will be able to organise and prepare their claim in a fast and efficient manner. This is thanks to the reports and analytics features offered by made.simplr. What’s more, the system offers a mobile-friendly interface so your client can access their claim at any time.

What your client will also get from made.simplr is access to a team of experts, well versed in processing R&D tax credit claims. This, coupled with full integration with Xero accounting, will allow your client to easily maximise their claim. You can be sure no qualifying R&D projects will get missed, and certainly not the failed or unsuccessful ones.

Book a demo today!

content team

Our Content Team is the R&D specialised, curious and thorough group behind made.simplr's blog and R&D resources, covering topics of interest to the R&D, accounting and innovation world.

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