Research and Development (R&D) Claims

Research & Development tax relief (‘R&D’) is a corporation tax incentive designed to stimulate innovation and development in the UK. Companies in a wide range of industries may be eligible for R&D tax credits if they are developing new processes, products or services and have made an appreciable advance in knowledge or capability in a field of science or technology through the resolution of uncertainty.

HMRC recently reported on the outcome of a first-tier tax tribunal case investigation into an R&D tax claim.

AHK Recruitment Limited worked with Optimal Compliance to compile an R&D claim for an internal software project. HMRC opened an enquiry to understand how the project qualified as R&D in line with the legislation. After months of delays following HMRC requests for evidence Optimal, on behalf of AHK, could not produce sufficient evidence around the projects and critically could not produce a competent professional at AHK to provide evidence. Whilst CVs were submitted, HMRC could not speak to them directly. The HMRC enquiry also highlighted that whilst subcontractors costs formed part of the claim there was no evidence of what they were doing and how it aligned to any potential R&D project.

What can we learn from this case?

HMRC are reasonable with R&D enquiries:
HMRC gave the company extra time and guidance to help them evidence what their R&D was.
It is essential to engage with HMRC when asked – companies or advisers should build a line of communication with HMRC that is both timely and accurate.

Don’t underestimate the role of a competent professional
As much as an accountant should drive out the eligible R&D expenditure with their clients, the company should always be able to present the competent professionals to HMRC.

The baseline is essential to establish the validity of a claim
This means evidencing what solutions were available, why they didn’t work and showing that enough work had been done to explore a solution before embarking on a project. To demonstrate R&D has taken place there needs to be an advance in the field which raises the overall knowledge above baseline. It also aligns to the current thinking in the HMRC tax credit consultation with calls for evidence of IP management at the start and throughout the R&D process.

Evidence in any R&D claim is a must
There is no actual requirement for technical evidence to be submitted with an R&D claim and it may only be required in an enquiry situation.

Third-party costs need to be documented
The costs associated with any claim, particularly from third parties, need to have solid and accurate documentation which details the specifics of what was done or delivered.

R&D claims are often complex and needs due skill and attention from a professional. We have saved our clients over £3.3m over the last 3 years. If you wish to explore your eligibility to claim R&D tax relief, please get in touch with one of our specialists.