Common issues when compiling an R&D tax credit claim
It has been well documented that HMRC have now tightened their compliance procedures with regards to R&D tax credit claims, with the introduction of additional staff and enhanced compliance checking procedures.
At Gateley Capitus we have always taken the view that it is best practice to try and answer any potential questions or queries that could be asked by HMRC by providing the supporting claim information in either the technical report or the qualifying financial information as part of the claim submission process.
The following are a few suggestions of how to try and minimise the potential for additional questions from HMRC, which in turn could potentially delay the payment of any potential R&D tax credit or lead to the opening of an enquiry.
- If it is not immediately apparent why a claim has been submitted under a particular scheme, provide an explanation i.e. subcontracted R&D, application of a grant, complex company structure resulting in the scheme thresholds being exceeded.
- Significant changes in claim value from previous years should be explained, with the level of technical detail reflecting this.
- Don’t include a percentage for overall staff costs without breaking down the figures into individual employees and how their costs relate to qualifying R&D activities. A description of qualifying activities should always be included and broken down at an individual level.
- Don’t include 100% of an employee’s PAYE costs. Unless there are very specific circumstances, there is always the view that any employee will be involved in some non-qualifying activities as part of their day-to-day activities.
- A lack of specific details about the R&D being claimed in the technical report and going for the “thud factor” – multiple pages of generic company information from the claiming company’s website or the industry sector which relates to the claiming company combined with readily available technical information – will not be well received. Not providing HMRC with the information they need in order for them to determine if the submitted claim is qualifying against the scheme rules may well lead to additional questions.
- Including a percentage of “overall running costs” as part of the company’s qualifying R&D expenditure.
As part of your R&D claim process you should also consider:
- Keeping notes on the R&D as it is happening. When it comes to detailing the technical information, having notes will enable the timely compilation of the detailed information required to support the claim ensuring that all relevant details are captured. It can be difficult for competent professionals to remember the exact details of a project that could have been carried out a couple of years ago. They will be thinking about today’s problems and issues and there is a chance the details could become confused or missed resulting in an inaccurate claim either technically or financially.
- Record keeping applicable for your business. Records kept by individual companies will vary; larger companies with more than one project could have a more structured approach to record keeping, than might be the case for small start-up companies. This will enable you to determine the actual R&D percentages that are applicable to members of staff, EPWs, subcontractors and consumed items. It may be higher than you think when you come to think about R&D at the end of the year.
Whilst the above list is far from being comprehensive, taking into consideration these points and putting yourself in HMRC’s position should hopefully minimise the potential for additional questions. Ask yourself “what information do I need to provide that would enable HMRC to determine the validity of the this claim against the R&D scheme guidelines?”