Four common mistakes observed when reviewing R&D tax credits claims

Following the recent publicity around the research and development (R&D) tax credits scheme, we have been asked by several companies to review their latest submissions. 

This is mainly due to concerns around the accuracy of the advice they have received, and their awareness of the increased level of checks currently being undertaken by HMRC. Through these reviews, we have identified four commonly made errors that are being repeated in the compilation of claims and supporting documentation.

1. Project duration

While every project has its value, it is very unlikely that a short-term project, such as one that spans over the period of a few days from start to finish, will qualify as R&D. This is due to the perspective of HMRC that a ‘competent professional’ would be able to complete the work in a short period of time and naturally extend their knowledge in their field. It is crucial to exercise judgement and exclude projects that fall into this category. 

Eligible projects need to include technical or scientific uncertainties that are not readily available or deducible by a competent professional working in the field.

2. Omission of eligible staff

When it comes to identifying the persons involved in a R&D project, it is of course easier to identify those that have been directly involved. However, we regularly see the omission of those undertaking qualifying indirect activities that have contributed to the R&D project. 

It’s important to ensure all activities that form part of a qualifying project, but do not directly contribute to the resolution of the technical or scientific uncertainty, are included. For example, supporting activities such as maintenance, clerical support, finance and personnel activities in so far as undertaken for the R&D project.

Other qualifying indirect activities include feasibility studies to inform the strategic direction of a specific R&D activity, training required to support the R&D project and research carried out by students or researchers at universities. 

3. Lack of accurate technical detail 

Although it is currently not a stipulation to include a technical report with an R&D claim, it has for many years been seen as good practice to do so. However, we continue to see reports that provide general information and sales and marketing details about the project, rather than including the relevant details required to fully support an R&D claim. These reports often have minimal reference to the technical/ scientific uncertainties and advances. A lengthy report does not necessarily justify the qualifying R&D projects.

HMRC has now mandated the information it requires as part of the submission process and from 1 August 2023 each project will need to be described under these five headings:

1. What is the main field of science or technology?
2. What was the baseline level of science or technology that you planned to advance?
3. What advance in that scientific or technical knowledge did you aim to achieve?
4. What scientific or technological uncertainties did you face?
5. How did your project seek to overcome these uncertainties?

4. Inaccurate expenditure information

The miscalculation or over inflation of qualifying staff time is another commonly identified error. It should be remembered that in many cases not every element of an R&D project qualifies for the scheme. The time being included should be carefully considered and justifiable through company reports or records.

Other areas of claimable qualifying costs have been omitted from claims and this may be due to a lack of record keeping or a failure to understand eligible qualifying costs. Consideration should be given to all areas of expenditure to ensure that an accurately detailed claim is submitted. 

As detailed previously, the changes from 1 August 2023 will also affect how the costs are reported to HMRC and these will now need to be broken down to a project-by-project level. 

Getting the right advice

The intricacies of the R&D tax credits scheme require an in-depth understanding of qualifying activities and eligible expenditure. Although internal technical and financial teams will have been involved in the projects, and are experts in their relevant fields, the necessary requirement of understanding specifically which activities qualify under the scheme for tax purposes often requires an expert adviser to accurately deduce. By addressing these overlooked areas and working with a trusted adviser, companies can strengthen their claim process and accurately determine the benefit being claimed.