R&D Tax Credits - Don't fall through the HMRC trapdoor
There’s a well-known saying that “proper planning and preparation prevents poor performance” and that phrase can certainly be applied to claiming R&D tax credits.
If you don’t put in the time and effort to properly prepare your R&D tax credits claim, you may fall through a trapdoor into a series of HMRC enquiries into your claim.
You can expect a long and not so nice letter from the HMRC R&D unit, with a long list of questions as well as a request for evidential justification to support your claim.
It doesn’t stop there though. You can also expect a few rounds of correspondence and you shouldn’t be surprised if HRMC takes a hard line on asking ‘is this project really an advancement in science or technology?’.
To help avoid falling through this HMRC trapdoor, which can delay your claim and take up unnecessary effort, we recommend the following 5 top steps to take when preparing an R&D tax credits claim.
1. Submit an R&D tax claim report to HMRC
Although it isn’t a legislative requirement, HMRC prefers you to submit an R&D tax claim report that includes a detailed breakdown of the costs you are claiming and a comprehensive technical report.
If you don’t submit an R&D tax claim report, HMRC may well come back to you with a long list of questions and a request for more information.
2. The R&D technical report needs to provide an outline of the project and answer the following questions:
What was the state of art (SOA) at the commencement of the project and how does this project make an appreciable improvement over the SOA?
At the commencement of the project, did the technical lead identify any technical uncertainties that, if resolved, would amount to an advancement in science or technology within the marketplace?
Is the knowledge or capability required for the project not readily available in the public domain, and considered not easily deducible by a competent professional working in the field?
3. Invest in a timekeeping system.
As a minimum, we recommend that each person directly engaged in R&D keeps a record of their time. This needs to be kept for each R&D project and split between qualifying and non-qualifying activities.
HMRC will consider best estimates for early year claims and appropriate apportionment of time for people indirectly involved.
4. Make sure you submit your R&D tax claim on time and don’t leave it to the last minute.
A business can submit an R&D tax relief claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made (paragraph 83E(1) of Schedule 19 to the Finance Act 1998).
This means that a business can make claim for R&D tax relief going back 2 accounting years. The claim can be made in a company tax return or in an amendment to it.
5. Engage with an R&D tax credit firm that employs technical experts, cost accountants and R&D tax specialists.
A reputable R&D tax credits firm will ensure that your claim is maximised and fully documented.
Ideally, engage with a specialist boutique consultancy that understands your industry sector, as they will be able to identify all qualifying projects and eligible costs as well as prepare the technical report.
It is important to make sure that they will respond to any questions or enquiries from HMRC at no additional cost.
If you are considering using an online R&D tax claim portal, then we would recommend that you use one which is guided and fully supported by leading technical experts, cost accountants and R&D tax specialists, such as Tax Cloud.
Who qualifies for R&D Tax Credits?
Many businesses don’t realise that they qualify for R&D tax credits or that they are not claiming their full entitlement.
The R&D tax relief scheme has been in existence for over 15 years and nearly £3bn per annum is currently being claimed.
Any company that is taking a risk by innovating, improving, or developing a product, process or service will very likely qualify for R&D tax relief.
The project must contain a level of technological or scientific uncertainty (in the opinion of a competent professional) and must seek to achieve an advancement in technology.
If the team involved with a project were scratching their heads to find a solution to technological challenges, that’s a good indication that qualifying R&D activities were taking place.
HMRC’s own detailed definition of the R&D tax relief scheme is available online as the Corporate Intangibles Research and Development Manual CIRD 80000 at https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird80000.
Alternatively, please visit www.myriadassociates.com to learn more about R&D tax credits.