R&D Tax Relief Claims – The Way Forward
In our previous two articles, The New R&D Tax Relief Enquiry Landscape, and R&D Tax Relief Claims and the Burden of Proof, we considered the changes in HMRC’s approach to R&D tax relief and whether it was leading to unintentional and unwanted consequences. In this article, we move on to discuss the way forward for businesses and take a closer look at the recently published guidance on the forthcoming April 2023 changes.
The Way Forward
The current pace of change in the R&D tax sector is unprecedented. Keeping up to date with everything that has happened in the previous two years is a difficult task in itself. Our advice to companies is simple: get it right from the start to minimise the risk of a lengthy and complicated enquiry. Although there is no single ‘right way’ how to make a correct claim, using a qualified, experienced adviser gives the best chance of hassle-free success. Experienced advisers know what HMRC want to see, they know their application and interpretation of the legislation and they understand key risk areas of claims.
In our experience, best practice means a claim that:
- Provides a clear, concise account of how the company sought an advance in a field of science or technology, through the resolution of scientific or technological uncertainty.
- Cleary outlines the baseline in technology that any advance sought was being measured against, and defining the limitations of the (pre-advance) technological baseline.
- Avoids heavy emphasis on any commercial gain or benefits. Emphasis on the scientific or technological enhancements is far more important.
- References the legislation and BEIS guidance throughout the narrative.
- Gives documentary corroborating evidence such as test reports, patent applications, grant applications, pictures, videos, schematics, correspondence between suppliers or sub-contractors or internal meeting notes.
- Distinguishes between business as usual challenges and challenges that go beyond what a company would be expected to encounter in its line of business.
- Does not assume that just because there has been an advance in technology in one year, there will be another one the following year. Treat each year as a new start in reviewing the steps listed above.
- Gives details of the competent professional, outlining their relevant qualifications and experience in the appropriate field of science and technology.
- Provides a full breakdown of qualifying expenditure. The costs should also be supported by evidence to satisfy HMRC in the event of an enquiry.
New Guidance for April 2023 Changes – What Should a Claim Include?
In December 2022, HMRC provided further details about the changes which will be affect claims made for accounting periods beginning on or after 1st April 2023. The new guidance outlined the statutory requirements for R&D claims. Under the new rules, claims will not be valid if they fail to include the following:
- The Unique Tax Reference (UTR) number of the company
- Employer PAYE Reference number
- VAT Number
- Contact details of main internal R&D contact at the company - this is the person from the business responsible for the claim
- Main type of business carried out (SIC code)
- If completed by an agent, the agent reference number (if the agent has one)
- Contact details of any agent working on the claim
- Accounting period start and end dates
- Qualifying expenditure under the following categories:
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- Employee costs
- Externally provided workers
- Contracted out R&D
- Software
- Consumable Items
- Payments to participants of a clinical trial
- Data licence (for accounting periods starting on or after 1 April 2023)
- Cloud computing services (for accounting periods starting on or after 1 April 2023)
- Contributions to independent R&D costs (RDEC only)
- Amount of the above that is qualifying indirect activities (QIAs)
- Number of projects claimed for
- Descriptions of the projects under 5 headings:
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- What is the main field of science or technology
- What was the baseline level of science or technology that you planned to advance?
- What advance in that scientific or technical knowledge did you aim to achieve?
- What scientific or technological uncertainties did you face?
- How did your project seek to overcome these uncertainties?
- For 1 to 3 projects the company will need to describe all projects, covering 100% of the qualifying expenditure
- For 4 to 10 projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described
- For 10 to 100 plus projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described - however, if the qualifying expenditure is split across multiple smaller projects, describe the 10 largest
- Number of EPWs who worked on the projects
- PAYE scheme reference for those EPWs
At YesTax, we have years of experience of not only preparing R&D claims for our clients, but also in assisting accountants across the UK with HMRC enquiries relating to claims they have made themselves. It’s fair to say we’ve seen a number of horror shows, where claims have been incorrectly made or guidance has been completely ignored. In our experience, there seems to be a false confidence where claims have slipped past the eyes of HMRC.
Of the many R&D enquiries we’ve assisted with, a complete misunderstanding of what constitutes qualifying R&D, is the most common line of enquiry and one that claimants now cannot afford to ignore.
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