…If There is No Expert Advice Involved
For those businesses that have been trading since 2000 and fortunate enough to take advantage of RDEC accounting treatment for the last 17 years, their R&D activities have resulted in greater investment in the innovation economy.
Each year, the programme continues to gain popularity as more companies realise they have an opportunity to reduce or offset corporation tax. Those companies that are in loss making, have access to a cash option rather than increasing loss carry forwards.
For those businesses that have been claiming R&D tax credits for a number of years and believe the methodology of claiming is sound and there is little value in seeking professional advice, I would ask them to consider the following:
- Has the methodology for claiming R&D tax credits changed or improved since your initial claim?
2. Is your methodology based on a cost-based approach?
3. Is the company certain that no routine costs have been included?
4. Are the appropriate individuals in the company, specifically the resident competent professionals, completing the R&D claims?
5. Do you think your R&D claim submissions have reasonable evidence to support your R&D costs?
6. How many R&D claims have been questioned by HMRC where it reduced your R&D costs or the tax benefits took months or years to obtain?
7. Is the company 100% certain that it is capturing all research and development allowances?
We often come across companies that believe their methodology for claiming R&D tax credits could not be challenged by HMRC RDEC scheme. In a few cases, they are and if you are one of them, congratulations on a job well done! On the flip side, the vast majority of companies believe that they have it right until we ask them the above seven questions.
I would like to share one such success story. It’s about how we came across one of our current clients, who believed its own R&D claim process was sufficient and did not need a professional R&D tax credit provider. Well, things changed until we posed the seven questions to the senior management.
The client designs, develops and manufactures audio equipment. It had been making R&D tax relief claims internally for the prior 10 years with its claims averaging £50,000 per year in tax benefits.
Through an introduction from one of our accounting partner firms, we posed the seven questions which raised a fair degree of curiosity. It led us to carry out a review of their last two submitted claims in addition to the process undertaken to prepare the claims. As a result of this review, we determined the following:
1. The company reviewed the BIS guidelines to ensure it understood the main criteria of Technological Advancement, Uncertainty and the Concept of Systematic Investigation and Experimentation
2. The client then went through its list of development projects and selected eligible R&D projects
3. The client then prepared a narrative or project description for each project
4. The client allocated costs to the eligible projects
5. R&D costs were submitted on the tax return without any R&D evidence
6. The claim was questioned by HMRC, which resulted in an 18-month delay from receiving and the £110,000 refund for a two-year period.
Upon RDP’s analysis of the methodology, we asked one simple question. “What have you NOT claimed?”
From this question, we carried out the following activities and facilitated incremental R&D claims over a six-week period:
1. One of RDP’s key technology professionals, an electrical engineer, looked at all project centres, asked four to six questions and identified new eligible R&D projects that were NOT previously claimed;
2. Even though the client was aware of the BIS guidelines and the eligibility criteria, it had many misconceptions about eligibility of both projects and eligible activities;
3. As additional R&D projects and costs were identified, new narratives were prepared and associated costs allocated;
4. The corporate tax return was amended and the claim was resubmitted along with RDP’s R&D tax claim information package;
5. HMRC reviewed the submitted incremental claims without any queries; and
6. The revised claims for the two-year period were accepted in full for £432,000 in tax benefits
The difference between the 2 claims, therefore, was £332,000!
The primary reasons for the difference in benefits between the two preparation methods were as follows:
We believe that identifying R&D projects at the start of the process is the most important step that helps clients dispel many common myths about what qualifies as R&D.
Our peer-to-peer approach delves into the work to fully understand what is being accomplished on a technology level. We also participate in consultative committees with HMRC as part of our evolving R&D tax credit claim methodology to ensure our clients get their money as quickly as possible.
For a complimentary assessment of your company’s R&D claim utilizing the above seven questions, or a chronological assessment of your documented claims, contact the author:
[email protected] / (0) 203 002 0089. Ask about our Innovation Connection Programme (ICP), our real-time R&D tracking system.