In my previous article, I outlined the anti-abuse measures the Government are proposing to take in order to reduce the number of spurious R&D tax relief claims being made.
More officers have already been brought into the R&D unit to support the review process. Although we do not yet know the full extent of the changes to be implemented, with the increased manpower HMRC are focusing towards reviewing claims, it will be important to ensure that your company’s R&D tax relief claims are fully supportable if they come under HMRC scrutiny.
I have identified below some simple, yet often overlooked, areas to consider when preparing an R&D claim:
Mapping the project’s timeline
- Knowing where to start and stop the R&D ‘clock’ on the project’s timeline is important. Claims should not include costs for activities where there is no advance in technology nor resolution of technological uncertainties. For example, market research, reviewing currently available technology and the costs of commercialising the end-product do not normally qualify. Qualifying R&D activities can start and stop throughout a project’s life and identifying to HMRC that you recognise where the cut-off points are will provide reassurance that you have understood and applied the Guidelines correctly.
Check that the costs identified for the claim are within the qualifying categories of eligible expenditure
- Not all R&D expenditure is eligible for R&D tax credits, and HMRC guidance indicates that this is the most common error that they encounter in claims submitted to them.
Ensuring that costs agree to the company’s statutory accounts and corporation tax return
- Costs are only eligible for R&D enhanced tax relief or credits if they are deductible in calculating the company’s taxable profits. Accrual and prepayment movements can often significantly alter the amount reported as an expense in the profit and loss account. Preparing the R&D claim on an invoice or payroll only basis ignores these movements, and any other accounting adjustments, which could be quite significant.
Support the costs with appropriate narrative
- All projects being claimed irrespective of size should have supportable evidence of the activities that were undertaken. When providing details of these activities to HMRC, claimants should be mindful that the narrative is there to help HMRC understand the level of costs being claimed. If a company is making a significant claim, then describing the work undertaken should be proportional to that level of claim. There is no hard and fast rule about the level of detail to be presented but a substantial claim clearly warrants a greater level of explanation.
It is obviously not possible to make your claim 100% ‘enquiry-proof’ but following these tips should provide some assurance to both you and HMRC that the claim is more supportable.
For further information on R&D tax relief please contact Jemma Vaughan, Director at Hazlewoods, on 01242 680000 or at firstname.lastname@example.org