When compiling an R&D claim it is a good idea to reduce your risks and exposure as much as possible. Risks could include: the risk of a formal enquiry or an informal review being raised, the financial outlay and resource required to get a positive result from an enquiry or review and the risk of penalties to name a few.
Here are some tips and ideas for reducing these risks:
1. Submit a Report
Surprisingly, there is no obligation to submit a report of your R&D activity when making a claim for R&D Tax Credits. Though, it is highly recommended.
It is advisable to present a full and complete case for a claim in the initial submission as this will maximise the chances of success for a claim at an earlier date.
HMRC aim to review claims within 28 days. An Inspector may review the claim, and if no report is provided, they could have numerous questions about the claim. This can lead to an informal review or a formal statutory enquiry, both of which are time consuming.
In most circumstances, HMRC have one year from the date of the submission of the R&D claim to enquire into the claim. Once the period for enquiry has passed or an enquiry has closed, HMRC must open a discovery assessment and these can only be raised if they can prove:
· Careless or deliberate actions from the claimant or the agent.
· The Inspector could not reasonably be expected to have been aware of the situation based on the information made available to him.
A full and complete report that provides the exact information that HMRC want to see, that is presented in an orderly fashion will significantly reduce the risk of a discovery assessment.
2. Understand what is meant by an ‘Advance’
One of the key things to describe in your report is the specific ‘advance’ in science or technology that has been sought.
The definition is given in paragraph 6 of the Guidelines as:
“an advance in overall knowledge or capability in a field of science or technology”
This would appear, at first glance, to be a very high benchmark to meet. In practice and with good understanding, however, the guidelines can be very inclusive.
The advance can give rise to physical improvements such as new or improved products. But it can also give rise to some things that are more intangible, such as new processes or services.
Advances may be present within:
· New knowledge.
· A new process, product or service.
· An improved process, product or service.
· A duplicated process, product or service (as long as it’s done in a new or improved way)
The key is to understand the guidance and present your advance in the report clearly and succinctly.
3. Prepare as you go
Preparing for your R&D claim whilst you are performing the actual activity is the optimal approach – both for reducing risk and increasing your return.
The standard approach, both from an accounting and a specialist tax consultancy perspective, is to review your activity on an annual basis and make a claim for the accounting period that has just finished.
However, speaking from experience, we know it can be much more difficult to ‘justify’ a project as qualifying R&D when the activity is finished, and the work is done.
It is much easier to plan your project with the guidelines in mind, this way you can tailor your activity to ensure it qualifies and ensure you spend in appropriate areas. Sometimes, very small changes can make huge differences when it comes to reducing risk (and increasing return).
This is one of the major reasons why we pioneered the ‘Invo Pathway’ where we assess your activity throughout your accounting period, and this enables us to also look to other opportunities – not just R&D Tax Credits.
4. Make sure your costs qualify
As stated, this scheme is very inclusive.
However, costs are only eligible if they fall into one of the following categories of expenditure and depend on the scheme you are claiming under, make sure you know the definitions well:
· Staffing Costs
· Subcontractor Costs
· Externally Provided Workers
· Software Costs
· Consumable Items
· Subjects of Clinical Trials
· Contributions to Independent Research
5. Claim under the correct scheme
There are two schemes under which you can claim R&D Tax credits:
a. The SME Scheme
b. The RDEC Scheme
The most common factor that determines which scheme you claim under is your company size. The SME Scheme is limited to companies with fewer than 500 employees, and it must have either an annual turnover that is less than €100 million, or a balance sheet that is under €86 million.
Otherwise, you are limited to claim RDEC.
There are other factors to consider, SME companies may have to claim RDEC (or an element of both the RDEC and SME schemes) if they perform subcontracted or subsidised R&D or if they have received a grant which is notifiable State Aid.
6. Move towards better record keeping
A company is subject to general record-keeping requirements but there are no specific requirements for R&D record-keeping.
However, should an enquiry be raised it would reduce risk considerably if you have kept documentation relating to the R&D projects and can evidence a systematic, well-documented approach.
HMRC do accept that larger organisations with a track record are likely to have more detailed records than a smaller company working on its first project, and they will tailor their requests for information to reflect this.
7. Understand the basics
There are many basics to consider before making an R&D claim, to state a few:
· Were the accounts prepared on a going concern basis?
· Has the statutory cap on R&D relief been breached in any of the relevant accounting periods?
· The project is relevant R&D and relates to the company’s trade or intended trade.
8. Be prepared to answer questions
Enquiries are unlikely, especially if the steps presented here are taken. However, being prepared to answer further questions is a good position to take.
At Invo Capital, we have experience in dealing with enquiries throughout our team’s tenure working in the industry for numerous years. We would reduce your time investment to a minimum and deal with HMRC on your behalf and we would be prepared to provide any additional information they require.
9. Prevent errors or mistakes where possible
General errors including simple arithmetic or even typographic errors may add to the likelihood of an enquiry. These should be kept to a minimum or avoided.