In most cases, businesses cannot claim R&D tax credits for the VAT of their qualifying expenditure. The exception is when that VAT is not otherwise recoverable from HMRC. This could be because your business doesn’t reach the current VAT revenue threshold of £85,000. Alternatively, your business could be exempt from paying VAT.
The most common exempt businesses amongst R&D credit claimants are education, health and insurance providers. HMRC have a complete list of VAT-exempt goods and services.
If you are VAT registered at a standard, reduced or zero rates business then you cannot claim VAT costs in your R&D tax credit. This is because you will be able to recover the VAT on these costs in your VAT return. HMRC is aiming to avoid double subsidisation.
If you’re unsure about how to register your business for VAT, then we recommend this excellent guide from FreeAgent.
Qualifying R&D costs and VAT
Many claimants will not actually claim for VAT rated goods or services in any case. This is because the majority of R&D expenditure is staff costs, which is not subject to VAT.
However, if you claim for consumables, such as building materials, or expenses such as hotel accommodation, then those would be subject to VAT.
We recommend reading our guide to qualifying R&D costs to understand which costs you might be able to claim for.
VAT returns, R&D tax credits and coronavirus
If you have any outstanding VAT debt with HMRC then they will pay your R&D tax credit minus the amount you owe. This also applies to CT and PAYE debt, as well as other forms of outstanding tax liabilities.
During the first lockdown, HMRC allowed the deferral of some VAT payments. This suspended the typical practice of off-setting the VAT liability against the R&D tax credit. You can find out more about the Coronavirus VAT debt referral on the HMRC website.
Claiming R&D tax credits can be especially complicated when you factor in other forms of taxation and subsidisation. Recent coronavirus stimulus measures such as CBILS and the furlough scheme have also affected the amount of R&D tax credit you can apply for.
This reconfirms the need to have a trusted advisor for your R&D tax credit application. By engaging a specialist, you ensure that you avoid unnecessary enquiries, as well as claim the maximum amount available to you.
At EmpowerRD we combine the best R&D claims advice with an intelligent online platform to speed up the claims process. We are one of four trusted advisors on HMRC’s R&D Consultative Committee and boast ex-HMRC inspectors amongst our claims team. Our platform significantly speeds up the process of submitting a claim, with claims sometimes taking less than a day to complete.
Get in touch with one of our team to find out how much your R&D tax credit is worth.