There are two elements that make up a successful and robust claim: a technical narrative and detailed financial calculations. The purpose of which is to demonstrate to HMRC that the project undertaken meets the definition of R&D and includes qualifying costs with supporting evidence.
The technical narrative should be written with input from those involved in the project and detail the specific nature of the advance and uncertainty, and how a competent, qualified person addressed this, demonstrating to HMRC the process undertaken and the technical hurdles required to achieve success.
This is the substantive element of the supporting documentation and should clearly articulate current limitations, as well as the challenge of addressing these, resulting in either a description of the final solution or an outline of the reasons for which this process failed.
The financial calculations are made up of staffing costs, consumable materials and utilities amongst others. The bulk of the expenditure is likely to be staffing costs and will make up much of the claim value. Where only a proportion of a director’s or employee’s work constitutes direct and active engagement in relevant R&D, only that proportion of their cost can qualify. Timesheets are a useful recording tool to support the time spent by each member of the team on the R&D project.
For most other costs an apportionment should be taken that reflects the proportion of the business devoted to R&D activity.
Submission and support of claims
There is no requirement from HMRC to keep additional records relating to a claim for R&D tax credits, however, best practice does require a claimant to prepare a short report to support the filing of a tax return, including R&D tax credits claims.
HMRC aim to process SME claims within 28 days and in 95% of cases this is achieved. However, one thing that may slow down this process, or lead to a query being raised, is poor reporting. A tax payer must be prepared to provide sufficient evidence to support a claim if called upon by HMRC. Failure to do so risks a reduction in the claim amount, or in extreme cases having a claim rejected in its entirety.
If the claim has been prepared using the methodology discussed here, then it is unlikely that HMRC will take issue, but be prepared for an enquiry.
What happens if there is an enquiry?
At the start of an enquiry, HMRC will either discuss the claim over the phone or at a face-to-face meeting with the view to understanding the nature of the R&D claimed for and to confirm the costs included. There may not be an obvious reason why HMRC have opened an enquiry; it may just be because they are reviewing all claims in a certain sector to check consistency across the process.
This initial discussion may result in:
- HMRC accepting the original claim;
- HMRC offering the option of a negotiated settlement; or
- The enquiry continuing with further meetings and discussions held until resolution.
At Gateley Capitus we support each of our claims and will take the lead role if an enquiry is opened to resolve any queries as quickly as possible, with minimum impact on the claim value.
Should you find yourself with a HMRC enquiry into a claim prepared in-house, or by another advisor, we can also assist. Our team is led by Peter Jelfs, an ex-HMRC R&D specialist who understands what is required to minimise the disruption caused by an enquiry. Contact us on 0121 212 7929 or mailto:firstname.lastname@example.org and we would be happy to help.
Next week’s blog will be the fourth and final one in the R&D series, covering Advance Assurance, which was introduced in 2016 to provide SMEs with the guarantee that their R&D claims will be accepted if they are in line with certain criteria.