As members of the HMRC R&D Tax Credit Stakeholder Group, we participate in regular meetings with HMRC. In our last meeting, HMRC outlined some common areas where companies err in filing R&D Tax Credit claims. Especially the information included in the Additional Information Forms (“AIF”).
Common Errors:
- The claimant does not provide enough information on the 3 R&D Tax Credit criteria
The 3 key R&D Tax Credit criteria are:
- Technological Uncertainty (TU)
- Technological Advance (TA)
- Systematic Investigation (SI)
Many companies do not understand these definitions especially TU
We believe the TU is the most important criterion in that an R&D project commences when a TU is identified, an R&D project ends when a TU is resolved, and the TA is the result of the TU resolution. A lot of companies describe a TU in terms of the functionality created by the new product or process. However, the focus must be on how the product or process was created. For example, a TU might focus on the limitations of software tools to overcome scalability issues. The focus here is the computer science problem of scalability, not the software features that are being developed.
HMRC states that many of the descriptions of the R&D project included in the Additional Information Form are too vague for HMRC to assess if the R&D project qualifies, resulting in a Query. The difficulty is that the HMRC caseworker has no technical background, and as such, the R&D project descriptions must be written in a way that a layperson can understand the TU and TA.
This is where RDP’s technical team comes in. We have prepared over 10,000 R&D Tax Credit claims, and our technical team of software engineers and life science professionals can bridge the gap and properly formulate the R&D project descriptions.
1: Focusing too much on the company’s perception or point of view of R&D and not speaking from the industry point of view. Especially to establish the baseline of technology
It is very important that the company view the R&D project from an industry or “peer” point of view. As a first step, the company must describe the baseline of the technology related to their R&D project. If the “how” to develop their product or process is already in the public domain, the research is known and therefore ineligible. The company must convince HMRC that, from an industry point of view. Their R&D project cannot be solved through known information that a Competent Professional should be aware of.
2: No detail on appreciable improvement
Somewhat related to point 2 above, companies need to differentiate between the current technology and Appreciable Improvement. While an Appreciable Improvement can qualify as an eligible R&D project, it must meet the 3 R&D Tax Credit Criteria. Again, the focus on the TU is critical. The TU must be sufficient to warrant an R&D Tax Credit claim. One way to think of it is if the company presented their R&D project to a group of technical peers. Would these peers see the project as an R&D project? In effect, our staff are those technical peers who can make this assessment.
3: No justification of allocation of R&D costs to each R&D project (just blanket allocations)
Some companies can be flippant in setting out the costs related to R&D projects. As an example, the company states that an employee spent 50% of their time on the R&D project. To HMRC, this looks like a guess. It appears no effort was taken to identify the eligible R&D activity within the R&D project and then provide the employee hours of that activity supported by technical documents.
RDP’s Innovation Connection Program (“ICP”) is a bespoke system that our clients can use to properly identify and track R&D work in real-time thereby removing the “guess work”
4: Not responding soon enough to compliance checks and not sending in enough detailed information sooner
If a company misses a deadline to respond to HMRC’s Request for Information, or if they ask for extensions, HMRC may take the view that the company is not organised and is scrambling to assemble the information. To HMRC, this may mean that the company did not seriously evaluate or assess whether they qualify for R&D Tax Credits. A suspicious HMRC caseworker may also think the company is hiding something.
A quick and detailed response to HMRC demonstrates the company is organised and takes its R&D Tax Credit claim seriously.
RDP prides itself on how we assist clients with compliance reviews, ensuring that the compliance check runs smoothly in a time efficient manner.
5: Not providing enough information on the Competent Professional; education, experience and what attributes enable the person to be a Competent Professional to judge R&D eligibility.
Competent Professional
As the HMRC caseworkers have no technical background, they rely heavily on company’s Competent Professional. HMRC will consider the academic background and experience of the key technical employee or consultant identified as the Competent Professional. It is important to convey to HMRC that the Competent Professional is the right person to evaluate and assess the eligibility to claim an R&D project as eligible for R&D Tax Credits.
Quite often, the Competent Professional is not well-versed in the R&D Tax Credit terminology or definitions. RDP has found that the Key Technical Person/Competent Professional needs assistance. This is where RDP’s technical staff comes in to bridge the gap and convey the right information to HMRC.
Are you having issues regarding your R&D Tax Credit claim
If you are having any issues with an HMRC Compliance check of your R&D Tax Credit claim or if you have any questions concerning R&D Tax Credits, please contact us.