In a perfect world, all R&D staff, or those working on R&D projects, would keep time reports that detail all their R&D activities. However, we are often asked, “how would I allocate our employees’ time if we did not keep time reports?”
The overriding principle here is that R&D activities carried out by employees must be reasonably allocated to an eligible R&D project. This is where our technical specialists come into play. As we work on a peer to peer basis (i.e. RDP’s engineer talking to your client’s engineer; RDP software specialist talking to your client’s software developer), RDP’s technical specialist can judge what is reasonable. In other words, is it reasonable for someone to have taken two months to develop a prototype or two months to re-architect a software platform?
There is no question that HMRC would prefer contemporaneous documentation, but the documentation does not have to be restricted to time reports. Documentation, such as the ones below, can provide evidence the R&D work was done. They include:
- Project planning documents;
- Records of resources allocated;
- Records of trial runs;
- Status and/or progress reports;
- Design of experiments, feasibility plans with details of the methodology adopted;
- Project records, laboratory reports, notebooks, patent applications;
- Iterations of designs;
- Minutes of project meetings;
- Test protocols, data, analysis, results, conclusions; proof of concepts, samples, prototypes;
- Emails or data from a dedicated project management software system
Identify the eligible R&D projects, then eligible R&D activities, followed by employee time allocation. This method makes time allocation easy.
For first time claimants, HMRC is usually lenient on the documentation, however, once you have submitted R&D tax relief claims, you are obliged to create some forms of contemporaneous documentation.
Many tech companies, for example, use systems like Slack for project management that can also be used to track R&D work. It is likely that many companies use systems that can be modified to capture R&D contemporaneously.
Before you get to allocating time, it is important to identify what R&D activities carried out by staff qualify to claim.
Qualification of staffing costs falls into two categories:
- Activities that directly contribute to the resolution of technological uncertainty; and
- Qualifying indirect activities.
Activities that contribute to R&D include:
- Activities to create or adapt software, materials or equipment needed to resolve the scientific or technological uncertainty, provided that the software, material, or equipment is created or adapted solely for use in R&D;
- Scientific or technological planning activities; and
- Scientific or technological design, testing, and analysis were undertaken to resolve scientific or technological uncertainty.
Qualifying indirect activities:
- Scientific and technical information services, insofar as they are conducted for the purpose of R&D support (such as the preparation of the original report of R&D findings);
- Indirect supporting activities such as maintenance, security, administration, and clerical activities, and finance and personnel activities, insofar as undertaken for R&D;
- Ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes);
- Training required to directly support an R&D project;
- Research by students and researchers carried out at Universities;
- Research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right; and
- Feasibility studies to inform the strategic direction of a specific R&D activity.
Once you identify the staff and the eligible R&D activities, then allocation becomes easier. There is an element of judgment as there is in most R&D tax credit criteria, but experience with the programme here helps.
The problem many companies run into is that their standard documentation does not capture R&D. For example:
- Documentation created during an R&D process may focus only on the outcome. There is no reference to the technological barriers or systematic investigation during the R&D phase;
- Many organisations underplay potential failures, difficulties, and uncertainties in order to support the business case and the need for financing. The lack of clear details of potential technical difficulties may work against the requirement to resolve technological uncertainties when claiming the credit;
- To get management buy-in, many tech staff do not want to highlight the need to deviate from standard engineering practices, for fear of management finding the project too risky;
- The Agile approach to R&D and product development has decreased emphasis on traditional time reporting and record-keeping of R&D work.
Documenting R&D has always been a pain point for clients. However, if you keep no documentation, your R&D tax credit claim can be at risk. That is why RDP developed its Innovation Connection Program (ICP). ICP is easily integrated into a client’s existing system. Typically, it takes less than 15 minutes a month to document the R&D effort using our system. What you end up with is a bullet-proof R&D tax credit claim.
Allocating R&D effort to R&D projects is quite easy if you follow the proper sequence to preparing an R&D tax credit claim. Our ICP makes this process and sequence painless and efficient.
Contact RDP for any issues or questions you have about allocating R&D effort to eligible R&D projects.