10/01/2022
6 TIPS FOR MAKING STRONG R&D CLAIMS
6 tips for compiling strong Research & Development (R&D) Tax incentive claims
(i) UNDERSTANDING WHETHER YOUR COMPANY IS UNDERTAKING ELIGIBLE ACTIVITIES
Before making a R&D claim, it is worth understanding whether and to what extent your business is undertaking eligible activities. The definition of what constitutes as eligible R&D for the purposes of the tax incentives is quite broad and encompasses a wide range of activities. Engaging in early discussions with a specialist can provide useful insight into the eligibility criteria. This initial step will become even more important from April 2023 when the government intends to introduce a requirement for advance notification to HMRC of the intention to claim. Without meeting this criterion, a company will not be able to submit a claim, even if it is undertaking eligible activities.
(ii) ESTABLISHING WHAT R&D SCHEME THE CLAIM WILL BE MADE UNDER
The rates of benefit vary according to whether or not the claimant qualifies to claim as a SME (Small & Medium sized Entity).
For revenue expenditure incurred by SMEs the benefit can range between a quarter and a third of eligible costs. For large companies this benefit is approximately 10% (net of tax).
Determining whether a company meets the SME criteria requires careful consideration of its ownership structure and control/voting rights. Claiming under the wrong scheme can lead to incorrect claims.
(iii) IDENTIFYING R&D ELIGIBLE ACTIVITIES AND DETERMINING THE OPTIMAL CLAIM METHODOLOGY
With the definition of R&D eligibility being quite broad, it is important to understand how this applies to specific sectors and businesses. Having a strong understanding of the R&D eligibility criteria is important to ensure eligible activities are correctly and fully identified across the business. Many organisations tend to miss out on eligibility deeply embedded within business as normal activities, leading to understated claims. Correctly identifying these activities is essential to derive an optimal claim.
For larger organisations or those with varied operations, reviewing each activity individually may result in a frustratingly time-consuming process. Therefore, determining an optimal claim methodology that will facilitate an efficient review of the business for R&D eligibility is another important and essential part of the process that should be considered and carefully planned in advance of any detailed work undertaken on the claim.
(iv) INCLUSION OF CORRECT COSTS IN THE CLAIM
Only specific cost categories can be included in a R&D claim. For example, whilst staffing costs are qualifying, the costs of dividends are not. This can be an important point for start-ups or for companies whose directors may be heavily involved in R&D activities but not taking a full salary. Costs for inclusion in the claim can also vary, based on other factors such as:
• whether and to what extent, project expenditure is funded through grants or subsidies.
• What types of activities the costs relate to. For instance, the rules are nuanced for:
R&D activities subcontracted to the company, or alternatively, where the company may have subcontracted these to another party;
Whether and to what extent the costs of tests or prototyping meet the criteria for consumables etc.
A thorough understanding of the R&D legislation is necessary to ensure that only qualifying costs relating to eligible activities are claimed.
(v) INVOLVEMENT OF COMPETENT PROFESSIONALS IN THE CLAIMS PROCESS
A competent professional for this purpose is someone who has accumulated experience and a successful track record in his field. He will be aware of the current state of knowledge within his field and the relevant scientific/technological principles involved. For the R&D claims process, it is important that this person is closely involved in the project activities that are being considered for inclusion in the claim and has a clear understanding of the R&D eligibility criteria. HMRC have occasionally found that claims compiled without the involvement of the company’s competent professionals have lacked clarity on whether the claimed activities met the R&D eligibility criteria. This has led to some claims being disallowed and penalties charged.
(vi) INCLUDE A SUPPORTING NARRATIVE IN THE CLAIM
Whilst not currently mandatory, HMRC have suggested that the claim figures are supported through inclusion of project narratives demonstrating that the company has undertaken qualifying R&D, together with a breakdown of the main headings of qualifying costs claimed. This will pre-empt answers to any questions that HMRC may have on the claim, facilitating prompt claims agreement. From April 2023, submitting these details will become mandatory.
