HMRC now routinely carries out compliance checks of R&D tax credit claims submitted. Below is a situation that occurs all too often. 

The Company

A large software company specialising in supply chain management had been filing R&D tax credit claims. They received a compliance check letter from HMRC. Which related to their most recent R&D tax credit submission. The company was very surprised that HMRC was challenging the claim. Given the company has received previous refunds from their R&D tax credit submissions.

In addition, the amount of information that HMRC was asking for, over and above what had been submitted, was daunting. The company had asked their accounting firm for assistance and because HMRC was questioning the software development as potentially ineligible, the accounting firm referred their client to RDP Associates.

The Challenge

RDP assembled its team and initially reviewed the company’s R&D tax credit submission and HMRC’s concerns and requests set out in their letter. RDP agreed with HMRC that the submission made by the company did not contain sufficient information to enable HMRC to evaluate if eligible R&D projects had been claimed. Furthermore, there were errors in the calculation of the costs, and some of the costs did not appear supportable.

The Solution

RDP’s software specialist interviewed the company’s key technical staff to review the R&D work done. There were 2 projects, one large and one small. RDP focused on the large project first and was able to identify the technological uncertainty that established the R&D project. RDP then gathered information regarding the systematic investigation relating to the iterations and experimental steps taken. Based on the technological uncertainty identified and resolved during the project, technological advancement was established.

RDP prepared the response to HMRC outlining how the above criteria were met.

Turning to the costs, part of the HMRC’s confusion arose because the company had claimed R&D costs in 2 related companies. RDP isolated these costs and went through an exercise to ensure all costs related to an eligible R&D activity and cost fell within the eligible R&D project and was claimed in the correct company. Who then also dug deeper into the allocation of costs to the R&D project. By reviewing evidence provided by the company (such as emails, notes, and design documents) to establish a proper allocation of costs to the R&D project timeline and ensuring the allocation was reasonable. RDP also corrected an error made by the client in calculating the eligible portion of arms length contract fees claimed (i.e. the client did not take 65% of contract fees as required by law) .

RDP prepared an analysis of the R&D costs along with an explanation to back up the allocation and reasonability of costs claimed.

The Result

HMRC accepted the eligibility of the large R&D project as well as the costs set out by RDP. HMRC also did not impose penalties on the basis that, in future, the company prepare its R&D tax credit claim in the same manner as the information supplied in response to their compliance check.  The company retained over 85% of their R&D tax credit claim and continues to use RDP to assist with their future submissions.

Contact our team at RDP if you want to find out more about our case study regarding a compliance check by HMRC  and how we can help your compliance check.

To discuss further on 0208 214 1341 or email Jenni at [email protected].