Author: Adam Spriggs
No one ever wants to endure a HMRC enquiry, and the prospect of one may deter some from making a R&D claim. Some of the key areas that often result in a R&D Tax enquiry are:
– Project identification
– Cost apportionment
– Project boundaries
– Additional information
All of the above can result in an enquiry costing you valuable time and resources if sufficient care isn’t taken when preparing your claim and the correct level of detail isn’t provided to HMRC.
Identifying projects
It’s important to distinguish between a project whereby your company learnt new information (implementing new software and learning how best to use it) and bona fide R&D projects. Your advisor is there to educate you on what constitutes an eligible project but its actually up to the company, specifically the competent professional(s), to put forward eligible projects.
It is vital that you fully understand the key criteria of the BIS Guidelines which details what activities do and not qualify as eligible activities within projects. This is the key as no project is likely to be 100% eligible, so not only should you be ensuring you properly identifying qualifying projects, but which aspects of those qualifying projects contain qualifying activities.
Whilst not common, detailing an aspect of the project that was time consuming but you recognise contains no qualifying R&D activity can demonstrate to HMRC that you fully understand the BIS guidelines eg procurement uncertainty due to a supplier ceasing to trade or uncertainty whether a local council would grant planning permission.
Cost apportionment
Whether it’s staffing costs, third party workers (EPW or subcontractors) or consumables, all costs should be analysed as to their contribution towards your R&D activities. Applying blanket percentages should be avoided unless dealing with a unexceptionally large workforce and your potentially grouping job roles together.
Make sure you look at these apportionments with each new claim, as applying the same percentages year after year, when your R&D activity is unlikely to remain at the exact same level, is likely to draw HMRC’s attention.
Project boundaries
This area is the most open to interpretation, as identifying when an uncertainty was resolved can be up to debate – whether being satisfied the taste of a new recipe meets a certain quality, or uncertainty regarding the strength and effectiveness of a bespoke piling technique that was only considered to be resolved once a certain level of floors had been built upon it.
In describing the activity that your company undertook, its important to detail specifically what the company was uncertain about, what alternatives were trialled, why they were unsuccessful and how the company used those learnings to make informed decisions along the project life cycle. Detailing why the uncertainty was overcome at a specific point is crucial to HMRC understanding that the project boundaries have been correctly drawn, alternatively when the company had to more on or give up on a specific line of thought because it couldn’t continue due to cost restrictions or time pressures.
Additional information
As a minimum, all reports should include a detailed breakdown of all costs as well as a write up for the projects being claimed, or a proportional representation of the type of R&D activity the company undertakes if they complete multiple projects during a year. However, there are many other criteria and requirements that need to be met for a claim to be eligible and providing this information, even if considered basic, can go a long way to pre-emptively answering any HMRC queries, this type of information includes:
– Who the competent professionals are
– Have any grants been received?
– Why you consider yourself to be classed as an SME
– Are you subject to CT in the UK
Whilst providing all of the above wont guarantee you will not receive a HMRC enquiry into your R&D Tax claim, it will help decrease your chances and ensure that focus is spent on key contentious points.
You may also like to read
Article: What to do in the event of an HMRC enquiry on your R&D claim
Article: Common misconceptions about claiming R&D tax relief
