THERE IS NO REQUIREMENTS TO KEEP RECORDS SPECIFICALLY FOR R&D TAX RELIEF, SO WHY DO IT?
Good record keeping increases robustness and maximises the value of your Research and Development (R&D) claim.
The ability to support a claim with accurate records means that challenge from HMRC is minimised. And so, the R&D tax credit is likely to be paid out quicker, i.e. more funding for innovation in your bank account!
Larger claimants or those with more than one project would be expected to have a more structured approach to record keeping. The records that you will need to keep will depend on your business and the type of R&D you are performing.
Whatever size your company is, HMRC do not expect you to buy a timekeeping system solely for recording research and development expenditure.
HOW TO ADAPT EXISTING RECORD KEEPING PROCESSES FOR R&D
The key areas to consider are your current projects (and any existing R&D projects), staff time, subcontractors, and consumables. Ideally, time spent on projects can be identified from timesheet records, however this can be a laborious task for your employees. While financial records help support the costs included in an R&D claim, they will not determine whether R&D is taking place. This is why it is important to examine the wider records your business may be keeping.
MEETING MINUTES
MINUTES
Do you hold regular team meetings? Something as simple as reviewing active projects, recording the individuals involved, and any technological challenges, risks and/or future goals, could provide underlying evidence that R&D has taken place.
RING-FENCING COSTS
RING-FENCING
Ring-fencing costs such as materials required in the early stages of development, mean that you may be able to justify including higher costs in the claim. We can work with you to ensure that costs of each classification are recorded under separate ledger codes. This will eliminate any need to retrospectively analyse these costs.
ACCESSIBLE RECORDS
RECORDS
Ensure records or documentary evidence are available and easily accessible. Documents such as internal progress reports, invoices, details of patent applications (which are non-qualifying for R&D), grant applications, or material provided to potential investors, can provide strong evidence that R&D has taken place.
TRACKING THE PROJECT TIMELINE
TIMELINE
As projects develop, you may find you are making notes on challenges and how they were overcome, information about any major changes to the project aims, or any new uncertainties that have been encountered. Material that shows a final product is deliverable in a short timescale may indicate that there was no requirement to resolve a scientific or technological uncertainty.
RESEARCH & DEVELOPMENT TAX RELIEF
FAQS
What activities qualify as R&D?
To receive R&D Tax Relief you need to ensure that you have carried out an R&D project which meets the government definition for tax purposes and have incurred qualifying costs on this project.
HMRC qualify research and development as overcoming technological and scientific uncertainties or challenges; aiming at achieving a technological and scientific advance that couldn’t be easily worked out by a professional in the field.
Whatever size or sector, if your company is taking a risk by attempting to resolve these uncertainties, then you may be carrying out qualifying activity. This could include creating a new process, product or service or improving on an existing one.
To claim R&D relief projects must meet all of the following criteria:
- aims to create a scientific or technological advance in the overall field.
- has or has tried to overcome scientific or technological uncertainty.
- the uncertainties could not be easily worked out by a professional in the field.
Whatever your R&D project, R&D claims are increasingly being scrutinised therefore good record keeping and a strong technical narrative to substantiate your R&D claim is important.
Which expenses qualify for R&D tax relief?
Many first-time claimants find it difficult to identify the activities and costs they incurred in the last two accounting periods. Our R&D experts ensure all qualifying activities and expenditure is identified in order to maximise the claim. It is important to note, not all R&D related expenditure qualifies for R&D.
In order to claim R&D tax credits, you must have incurred revenue expenditure in relation to qualifying R&D activity. The following categories of expenditure can be included:
Staff Costs: Cost of directly employing staff who are actively engaged in R&D activity. Includes: class 1 NIC, pension fund contributions, bonuses and (if applicable) payment to subjects involved i.e. for clinical trials.
Externally provided workers and subcontractors: Cost of paying a staff provider for staff provided to the company, or a sub-contractor who is directly and actively engaged in carrying out R&D activity.
Consumable Items: Consumable or transformable materials used directly in carrying out R&D.
Software: Revenue expenditure incurred on computer software employed directly in R&D.
Utility Costs: Power, water and fuel used directly in carrying out R&D.
What kind of projects do not qualify for R&D tax credits?
Routine analysis, copying or adaption of an existing product, process, service or material, as well as attempting to improve the cosmetic or aesthetic qualities of a product, process, service or material will not itself be R&D. However, work to create certain cosmetic or aesthetic effects through the application of technology can still qualify. Other non-qualifying activities include but are not restricted to, commercial or financial steps necessary for innovation, production, distribution, storage and repair.
How do I get my money?
If your company is loss-making, you can claim back up to 33% of your qualifying spend by surrendering a loss created by the relief for a payable cash credit. In other words, you can get up to 33p back for every £1 you spend.
If you are profit-making, you can claim back up to 24.7% of your qualifying spend, i.e. 24.7p for every £1 you spend. This is a reduction in your corporation tax liability. Where you have already paid your tax bill, the relief is given in the form of a corporation tax repayment. It is possible for the relief to create a loss, in which the loss created by the claim can be surrendered for a cash credit from the government.
I use foreign subcontractors from outside the United Kingdom, can I claim on those costs too?
The use of sub-contractors outside the UK need not affect your claim for tax relief.
How many times can I claim?
You can claim R&D tax credits after each financial period (when you submit a corporation tax return) as long as you are creating a new advancement in science or technology.
How long does the process take?
Our R&D tax team can prepare your claim within 1 week of receiving all the necessary information. Once the claim is submitted, HMRC generally take 4 to 6 weeks to process a claim.
How far back can I claim?
The R&D incentive is a Corporation Tax Relief. It is inserted in the Corporation Tax Return and the deadline for amending this return is 24 months after the end of your accounting period. Therefore, you are able to claim back two financial periods. For example, a business with an accounting year end of May 31st 2019 has until May 31st 2021.
How do you quantify a claim?
The R&D claim is based on a just and reasonable assessment of the proportion of costs relating to research and development activities, i.e. time spent by R&D staff on qualifying activities. There is no requirement to record time against R&D projects, however it could prove beneficial in ensuring a robust claim is put forward to HMRC.
Does my project qualify?
HMRC qualify research and development as overcoming technological and scientific uncertainties or challenges; aiming at achieving a technological and scientific advance that couldn’t be easily worked out by a professional in the field. In our experience, claims are often overlooked because business owners over-estimate the level of innovation required to claim. Contact us for a free assessment.
Can you work with my accountant?
We work with a large number of external accountants. Our team are happy to liaise directly with your accountants to obtain all the relevant financial documentation. We will prepare a technical report and a claim statement that your accountant can use when submitting your corporation tax return.
Can directors’ dividends be included in R&D tax credit claims
Directors’ dividends are not classed as qualifying expenditure for the purposes of research and development (R&D) tax credits. Therefore, you cannot include these in your claim. While there are personal tax benefits from being remunerated via dividends, rather than a salary, this could have a substantial effect of the value of an R&D tax credit claim.
The staff costs that can be included in an R&D tax credit claim include:
- Salaries
- Employer NICs
- Employer pension contributions, and
- Some reimbursed business expenses
FURTHER R&D TAX ADVICE
CONTACT US FOR FURTHER INFORMATION, OR TO REVIEW YOUR R&D CLAIM.
PARMINDER CHATTHA
Partner - Corporate and R&D Tax
Parminder specialises in Research & Development Tax Credits, leading the R&D department at Jeffreys Henry LLP. Since joining the Firm in 2015, he has been working closely with both SMEs and large businesses to analyse and maximise their Research and Development claims. He has so far secured over £70 million in R&D tax relief and credits for our clients.
KATE GREENHOUGH
R&D Director
Kate is a CTA qualified tax specialist with significant R&D tax experience. Kate has over 10 years of specialist experience in advising start-ups to PLC analyses, preparing and submitting robust R&D tax relief claims and Patent Box claims in line with the latest HMRC guidance. Her sector experience spans FMCG (fast-moving consumer goods), automotive, financial services, healthcare, manufacturing, construction, and food and drink.
