R&D tax credits are a valuable incentive for businesses which engage in qualifying R&D activity. Our separate article here explains more about the tax relief available and our robust claim methodology.
However, it is important not to skimp on the work needed to prepare a robust R&D claim. It is vital, not only to keep complete and retain appropriate records of the staff time and other qualifying costs incurred, but also to document clearly and carefully the objectives of each R&D project undertaken and to demonstrate that it falls within the rules on which projects are eligible for relief.
HMRC have stated publicly that scrutiny of R&D claims is to be stepped up over the coming months. In addition, a recent Tax Tribunal case illustrates the problems which can arise if insufficient care is taken over a claim.
http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11675/TC07718.pdf
Manager industrial engineer using tablet check and control automation robot arms machine in intelligent factory industrial on real time monitoring system software. Welding roboticts and digital manufacturing operation. Industry 4.0 concept
Some of the reasons why the company in this case lost their appeal were:
- They did not provide evidence that the project sought to achieve an advance in technology.
- The initial project descriptions focussed on the intended output of the project in the field of human behaviour, which was not science or technology.
- The descriptions, correspondence and evidence provided to HMRC did not satisfactorily explain how technology was applied / developed to deliver the overall aims.
- The evidence and descriptions were not provided by people directly involved in carrying out the projects.
- There was no evidence of how the underlying technology to deliver the project would represent an advance in technology.
- HMRC and the Tribunal were not satisfied with the assertion that the Project Lead was a ‘Competent Professional’ (in the field of IT). This meant that they could not accept the further assertion that the work involved an advance in technology due to the Project Lead not being able to resolve the issues which arose during the work.
- In the absence of a satisfactory, named Competent Professional, the taxpayer was not able to point to contemporaneous technical publications that set-out the state of relevant technology (machine learning) at the time of the R&D activities, with this being used as a benchmark to evidence the intended advance.
- The nature of some of the costs included in the claim was unclear. In particular, the invoices in respect of the sub-contractor payments included vague and varied descriptions of the services provided.
The Tribunal were therefore not satisfied that the business had demonstrated that their project was qualifying R&D.
The lesson from this case is that there is no substitute for doing the necessary spadework to justify and document an R&D claim properly. Doing so properly takes time and effort (and potentially adviser fees) but is worth the effort in the long run.
Businesses which envisage a sale or taking on investment in the short-to-medium term should be particularly careful to ensure their R&D claims are robust. Otherwise they run the risk not only of HMRC rejecting their claim, but also of value being lost following a pre-sale due diligence exercise.
Our approach to R&D claims is to prepare a comprehensive report, suitable for submission to HMRC, which sets out in full the basis for the claim and details of the eligible expenditure, and which has been compiled through discussion with the technical staff directly involved in the R&D projects and analysis of the underlying accounting records.
If you would like to discuss this in more detail, please get in touch with our Head of R&D David Nolanor your usual Claritas contact.
