20 Jun 2023

Navigating the Limitations and Restrictions on R&D Tax Credits

Ian Davie
Senior Consultant

Research and Development (R&D) tax credits offer valuable incentives to businesses engaged in innovative activities. However, it’s essential to understand that there are limitations and restrictions that govern the claiming of these credits. We’re here to help you understand the common limitations and restrictions associated with R&D tax credits and provide you with valuable insights to help navigate this complex landscape. 


Qualifying Criteria: 

One of the main limitations on claiming R&D tax credits is the presence of qualifying criteria. HMRC define specific criteria that research and development activities must meet to be eligible for tax credits. These typically involve factors such as competent professionals, technical uncertainties, and seeking an advance in science or technology. It is important that you understand how your R&D activities align with the requirements for claiming tax credits, in order to succeed.  


Eligible Expenses: 

R&D tax credits usually cover certain types of expenses incurred during the R&D process. While expenses such as employee wages, subcontractor costs, supplies, and indirect expenses are often eligible, there may be restrictions on the types of expenses that qualify.  

Additionally, legislation can impose limits on the percentage of eligible expenses that can be claimed and limit the benefit gained in certain circumstances. Therefore, it’s important that you familiarise yourself with the specific rules to accurately determine which expenses are eligible for claiming R&D tax credits. 


Substantiation and Documentation: 

Thorough accurate documentation is important in supporting your R&D tax credit claim and helping you to withstand potential HMRC Compliance Checks or enquiries. HMRC typically require comprehensive documentation that demonstrates the nature of the R&D activities, the associated expenses, and the eligibility of the project. Technical documentation, project records, time tracking, and other supporting evidence are often essential. 


Timeframes and Deadlines: 

There is a 2 year deadline from the end of the company financial year for claiming R&D tax credits and failing to meet these can result in the forfeiture of the credit. It’s important to understand the applicable timelines and ensure that you file your claim within the stipulated period. Additionally, in the future HMRC are imposing limitations on retrospective claims, meaning you can only claim credits for R&D activities conducted within a certain timeframe, if you have pre-notified HMRC of making an R&D claim. Being aware of these limitations helps you effectively plan and optimise your R&D tax credit claims. 


Collaboration and Subcontracting: 

Collaboration with other research institutes, companies or subcontracting R&D activities, in the UK and abroad, can introduce additional complications and restrictions. HMRC have specific rules regarding how the tax credits can be allocated and claimed in these circumstances. Documentation, agreements, or formal contracts may be required to substantiate the collaborative or subcontracted activities. Understanding the rules and limitations surrounding collaboration and subcontracting is crucial to ensure compliance and maximise your eligible tax credits. 


Intellectual Property Considerations: 

The ownership and management of intellectual property resulting from R&D activities can impact the eligibility for claiming R&D tax credits. Ownership of intellectual property may be a requirement, but not essential if carrying out sub-contracted R&D on behalf of a Large Company. It is crucial you understand the rules regarding intellectual property to ensure that your R&D tax credit claim accurately accounts for any associated restrictions or requirements. 


In conclusion, while R&D tax credits offer significant benefits, it’s important to navigate the limitations and restrictions that accompany these incentives. Familiarising yourself with the qualifying criteria, eligible expenses, substantiation requirements, deadlines, collaboration and subcontracting restrictions, and intellectual property considerations will help you optimise your R&D tax credit claims.  

Consulting with a tax professional or advisor who specialises in R&D incentives in your jurisdiction is highly recommended to ensure compliance and maximise the benefits of these valuable tax credits. 


Let the experts help 

Our TBAT R&D tax team brings an extensive wealth of experience and specialised knowledge to the table, dedicated to providing assistance and addressing any queries you may have. 


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