UK Research and Development (R&D) tax reliefs are generous and relatively easy to claim, but in recent years HMRC has become increasingly concerned about non-compliant claims and fraud. This means companies can now expect a greater chance of HMRC scrutiny, so it’s essential to make sure your R&D tax credit & relief claims are correct. Here are five tips to help put you on the right track.
- Involve your R&D lead/s in identifying what R&D your company has undertaken.
Your R&D lead/s, which HMRC refers to as the Competent Technical Professional/s, must be involved in assessing which projects and activities meet the qualification guidelines for R&D reliefs. If you can’t demonstrate that you arrived at the correct assessment of which activities qualify, you have little chance of your cost analysis standing up to HMRC scrutiny.
- Make sure you know what cost categories are claimable.
HMRC expects each R&D claim to be accompanied by a cost breakdown per claimable cost category. The main ones are Staffing; Externally Provided Workers; Subcontractors (SME claims only, not claimable under RDEC); and Consumables including Energy. If you claim any non-qualifying cost such as transport of goods or materials; capital expenditure on equipment; telecom, hosting or broadband – and this is likely to lead to time-consuming questions and claw-backs, including going back over past claims.
- Check you have applied the correct percentage to each cost category.
Not all costs can be included at 100% of the amount actually spent. For example, if you are using an unconnected agency to provide workers or to undertake subcontracted R&D activities, only 65% of the relevant cost can be included in your total claimable R&D cost figure. But if an agency is connected to the claimant company 100% may be claimable. This can be a complex area – if in doubt seek specialist advice.
- Work out your claimable R&D cost per project.
If HMRC decides to scrutinise your claim they will expects to see a project cost breakdown. Good practice is to provide a cost breakdown when you make the R&D claim. It should show the cost being claimed per cost category, per project. At the very least, if you are claiming for 3 or less projects, do a breakdown for all 3; or if more than 3, enough to account for at least 50% of your total R&D cost being claimed; or if your top 10 projects with the highest claimable R&D cost still don’t account for at least 50% of your claimable R&D cost, do a breakdown of the ten largest projects. The remainder can be lumped together as ‘All other projects’.
- Base your staffing costs on payroll records for the relevant accounting period.
You will already have submitted payroll information for your employees so it’s essential that any R&D cost claimed is based on your actual payroll figures and not estimates. It is OK to work out the cost based on percentages, e.g. if an employee costs you £40K and half their time was spent on qualifying R&D activities, the claimable cost would be £20K. Be sure to include each employee’s gross salary + employers NI + any company pension payments. Don’t be tempted to include staff that was undertaking non-qualifying activities. In an enquiry, this is easily challenged by HMRC.