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R&D expenditure tax claims - what is R&D?

What do you class as R&D?

Can I do a type of survey and ask what people who are dealing with R&D tax claims for client companies are classing as R&D activities? There are quite a few consultants 'selling' R&D claims work at around 18% of the tax reclaimed (I think) and they sometimes have a broader definition of what is R&D activities are than I had thought. 

Can I ask what people think of the following scenarios (some real and some not):

  1. An engineering company that receives drawings from clients and translates those drawings into a piece of equipment to go into a customer's premises. Each piece of equipment is bespoke for the particular space available. R&D? There is a risk that it can't be done for a particular space.
  2. A soap company that invents new formulas and fragrances, slightly unique in the World as far as they are aware? R&D for the development stage?
  3. A food manufacturer developing health or allergy recipes, again slightly unique in the World as far as they can tell. Likewise R&D for the development? 
  4. Accountants or financial advisor or insurance broker (or whatever) that try to devise a more steamlined way of doing something or other, using existing technology (sodtware or apps). R&D?
  5. A builder who tries to improve the housebuilding process by tweaking something (maybe gluing something instead of nailing it or something, having tested the strength using technology). R&D?
  6. A kitchen retailer who uses design software to plan out a kitchen. Again unique for the particular space in the house (unless it's a housing estate to the same design). R&D?
  7. Web design company designing websites, not using the same template every time, but using Wordpress. R&D every website?

Any other scenarios that you can think of that are R&D and fairly commonplace?

Can I also ask, do you charge for R&D services on a percentage basis or a fixed fee (or time taken maybe)?

 

 

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10th Oct 2018 16:43

Without getting into whether they should or should not have been correctly regarded as R&D (they shouldn't have been IMO), I have seen reports from "R&D Specialists" for points 1, 4 and 7. These were submitted and repayments made by HMRC (although I'm sure you'll appreciate that is not the same as saying they were correct).

I have also seen a report for a printing company that bought and sold/leased printers. Also involved in maintenance. They started buying in 3D printers and doing the same with them (no work to advance the machine, just selling or leasing and maintaining them).

The report prepared by the "specialist" looked like it had been prepared by a child on a school project. It listed lots of things that 3D printers could do - even went into great detail about the potential for making prosthetic arms - I can guarantee that our client wasn't involved in making the arm the report claimed.

What research did the client apparently carry out? Attended courses/sales pitches put on by those who manufactured/sold the printers so they could learn about them and how to maintain them.

According to our client, the only information they gave the R&D company was their payroll records, and from this they extrapolated a report and figure to claim. Amazing the amount of time sales people spend on R&D...

The reports were submitted direct by the R&D company so we had no involvement in them, and the company weren't willing to give us the details (we only fond out when a repayment notice came through). A tip for everyone, as the agent, you can call HMRC and get them to issue you the IXBRL filed return, as well as any PDF attachments that were submitted - hence how we managed to get the above reports.

"R&D Specialists" are by and large a bunch of charlatans. Apologies for any of the honest ones out their, but a large part of your industry lets you down.

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10th Oct 2018 16:57

This is the HMRC view:

https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-...

Could you analyse your examples 1 to 7 using that as a template and then we can critique your thoughts?

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10th Oct 2018 18:10

I’d say only 2&3 are R&D.

But then I’ve never claimed to be a “R&D Tax Claims Specialist”, just a good accountant doing a decent job.

In terms of fees, I’ve done a couple of claims @ 15% where I’ve had to calculate/find the figures, then a couple of £250 where they’ve given me the figures and I’ve literally just dumped them into the report & calculated the tax. In all circumstances, the client has provided the words for the 4 sections, I just cut & paste onto my headed paper.

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to atleastisoundknowledgable...
10th Oct 2018 20:16

I agree that 2 & 3 are (potentially) allowable. I have seen the ‘experts’ make claims for much less and take big fees. Not sure how helpful they will be at an enquiry.

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10th Oct 2018 19:37

At the risk of being pedantic, can anything be “slightly unique”?

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10th Oct 2018 22:18

I have been involved/prepared c 50-60 claims in the last 6 years (some via my employer, others through my own small practice). The usual charge was between 12% and 20% on a sliding scale depending on the size and complexity of the claim. This type of work usually brings a nice fee.

IMO examples 1-3 might have some mileage in them for an R&D claim depending on details and level of innovation. The rest of them IMO will fail as technologicaluncertainty criteria as this can easily be deduced by a competent professional in the field.

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11th Oct 2018 08:26

1,2, 3 & 5 are potentially R&D projects (the others are just their jobs), but not necessarily qualifying. You have to remember that one of the criteria for qualifying R&D is that the solution to the scientific or technological uncertainty could not be easily found by a competent professional, which is where I feel many of these claims companies will start to fall down.

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11th Oct 2018 15:52

One of the ways that these advisors make money is to leverage legitimate claims. Perhaps a bit dishonestly in some cases. An example might be that they allocate the time of the MD in attending meetings etc that didn't really happen and lots of other unprovable expenses

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11th Oct 2018 15:52

One of the ways that these advisors make money is to leverage legitimate claims. Perhaps a bit dishonestly in some cases. An example might be that they allocate the time of the MD in attending meetings etc that didn't really happen and lots of other unprovable expenses

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15th Oct 2018 10:30

Let's consider these in the context of the BIS guidelines. Scenarios 2 & 3 are clearly analogous to Example E - developing an improved formula for a weedkiller. So I would agree that these would (probably) pass the advance/uncertainty test. Scenario one is dangerously close to a build to print approach BUT if new techniques are necessary to achieve the package size (think F1 powertrain) there MAY be eligible activity.
Scenarios 4, 5 & 6 I would suggest are tenuous at the very best. As a practising R&D specialist I would screen these out for a number of reasons. Not least of which is risk to my reputation........
If we accept that scenario 7 makes use of Wordpress ONLY the likelihood of worthwhile eligible R&D seems pretty slim. More commonly the eligible activity arises where the client wants something more challenging that necessitates the use of php or similar programming languages.

As to fees, I charge a percentage dependent on the size of the claim with fees only becoming due when benefit is received.

As Lone_Wolf notes the standard of claims and the approach is hugely variable and, in some cases, the justification is, frankly, woefully inadequate. I agree that supporting information needs to articulate the uncertainty/advance and describe the work done in terms that a lay person can understand. HMRC are NOT competent professionals in the context of the application of the legislation. I interview my clients and write the supporting info BUT I always pass it back for review. After all, it's not my claim and my client needs to be comfortable with what is filed in their name.

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By Maslins
16th Oct 2018 10:49

My opinion - R&D tax relief should be scrapped completely. It doesn't encourage innovation. It encourages run of the mill businesses to negate their tax liabilities with questionable claims.

As things stand, claiming R&D is no doubt becoming more popular, as it seems claims consistently go through unchallenged. The argument is akin to the "but my mate claimed his sofa and holiday as office equipment and travel and he got away with it, why can't I?" It's a hard argument to counter.

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By Ruddles
16th Oct 2018 11:20

R&D is potentially in point for every one of those items - impossible to say one way or the other without considering the facts and circumstances of each and every project; your summaries are far too vague. I agree that some look less likely to qualify than others, but until the facts have been established ...

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25th Oct 2018 22:21

Would you claim for a baker developing a new product, researching how to produce the product on a larger scale and trials for baking and how best to package the end result?
Is this not routine for any new food product? My client has been on a course where they told him he could claim!

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to Homeworker
26th Oct 2018 09:14

As I've said, is there a scientific or technological uncertainty could not be easily found by a competent professional?

If not, then it's not a qualifying R&D project.

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By Ruddles
to Homeworker
26th Oct 2018 09:26

Homeworker wrote:

Would you claim for a baker developing a new product, researching how to produce the product on a larger scale and trials for baking and how best to package the end result?


If it fits the criteria, yes. If it doesn't, no.
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