The environment has changed substantially when it comes to the the new R&D regime. As most companies and accountants that are involved with filing R&D Tax Credits are aware. Yes, there have been many changes including changes to the R&D tax credit rate for both SMEs and changes to qualifying expenditures. But more importantly, HMRC’s view on the quality of compliance is very low.

By this I mean HMRC has been quoted as saying as many as 50% of all R&D Tax Credit claims are in error. Not to put too fine a point on it, but if one out of every two claims is in error, how can HMRC get compliance back within a reasonable target?

We have heard that more inspectors (over 300) have been hired to query R&D Tax Credit claims. The rate of queries has increased from a very low query rate of roughly 2% to as high as 15-20% of all claims filed each year.

This means in the current environment the odds of having a compliance check are very high. Companies that have experienced a compliance check know how arduous and time-consuming it can be not to mention the cash impact of a reduction in R&D Tax Credits. It is particularly painful for a company to have to repay R&D Tax Credits they thought were approved, sometimes with penalties added in.

How can you be sure your or your client’s company is compliant?

Currently, HMRC is denying most R&D Tax Credit claims on the basis the R&D project does not meet the criteria. We would tend to agree that what qualifies as an eligible R&D project is vastly misunderstood. For example, we have seen the following cited as eligible R&D work:

  • “We carried out extensive research to determine what methods and tools we could use to best manufacture our product”
  • “Our research related to evaluating how individuals will react and use our product”
  • “We conducted extensive market research to learn what technical and design characteristics. Which our new product should have in order to be an innovative product”
  • “We researched AI technology and tested several AI technology solutions in our business to find the right fit for us”

None of the projects cited above qualify as R&D projects. They have not met the key criteria or are not in an eligible field of science or technology.

New R&D Regime - Claims

Before you prepare or file an R&D Tax Credit claim it is worth taking a bit of time to understand the criteria. RDP makes this easy as we can ascertain eligibility in a short call at no charge. We can also provide detailed examples of R&D projects in your industry. That provide a good indication that the criteria will be met. 

In terms of the criteria to be met in the new R&D regime, here are the most important areas to consider.

Technological Uncertainty

Essentially there are 3 criteria to be met within the new R&D regime: Technological uncertainty. Technological advancement and Systematic investigation. Of these 3, technological uncertainty is the most important but also the most misconstrued.

The reason we say technological uncertainty (TU) is the most important criterion is that:

  • An R&D project starts when you identify a TU
  • The project ends when the TU is resolved
  • The TU in effect creates the technological advance (TA)
  • And the TU gives rise to the Systematic investigation

Identifying the TU is key. Most companies struggle with this definition as the definition provided in the HMRC guidelines is vague. Which requires judgement by someone knowledgeable in the field of science or technology. This is where RDP comes in as we have the key technical staff with the academic and practical experience in every field of science and technology. Having prepared over 10,000 R&D tax credit claims from start-ups to UK companies on the FTSE.

Competent Professional

As part of the R&D Tax Credit claim process, the company must identify its competent professional. Typically, this is the key technical employee overseeing the R&D project.

One of the nuances in the administration of the R&D Tax Credit scheme is that HMRC rarely uses their own experts to determine the eligibility of R&D claims. We operate in other countries like Ireland, Netherlands, Germany and Canada and the tax authorities in these countries employ their own competent professionals to determine project eligibility. However, in the UK it is up to the tax inspector to determine eligibility. As a result, the tax inspector looks closely at the background of the competent professional that the company identifies. HMRC weighs this factor heavily in their assessment. In other words, a competent professional with a PhD in the field of science/technology to which the R&D project relates will be viewed much more favourably than a competent professional with only industry experience.

HMRC prefers a competent professional with an academic degree. Because HMRC believes such a person is knowledgeable about the relevant scientific or technological principles involved. Also, they are likely more aware of the current state of knowledge in the field of science or technology as a whole.

While not having an academic degree is fatal to a claim, HMRC will want to understand how well-versed the competent professional is regarding technical/scientific principles and R&D state-of-the-art knowledge.

New R&D Regime

State-of-the-art Knowledge

Concerning the technology you are looking to develop, HMRC expects you to search what is available in the public domain. You can bet HMRC will do internet searches to see if the technology you describe in your project description provided to HMRC is already in the public domain.

However, there is an important distinction here. Developing a similar product or process to one that is available in the public domain does not prevent you from making an R&D Tax Credit claim. What needs to be in the public domain is a description or information on “how” to develop the technology underlying the product or process. If this information, on how to develop the technology, is in the public domain then the work is ineligible.

R&D Tax Credit claims have become exceedingly time-consuming to prepare. The good news is that RDP takes all this frustration, time commitment and cost out of it. In addition, we claim only the R&D projects and costs that our experienced technical staff deem qualifying.

Want to know more about the new R&D Regime?

If you or your client would like to know more, interested in a free assessment to determine if your R&D projects qualify or need help with filing R&D Tax Credits, please contact the RDP team to discuss further on 0208 214 1341 or email Jenni at [email protected].