This is an ongoing question that many companies ask when they approach RDP Associates, and the answer continues to evolve.
The main reason is that HMRC’s guidance on Research and Development (R&D) Tax Relief has become more stringent over the past 2 to 3 years. Particularly in relation to the definition and boundaries of qualifying R&D.
Often, companies submit R&D Tax Credit claims they believe meet HMRC’s criteria; however, they misunderstand where R&D truly starts and ends.
So, lets start with defining R&D. The BEIS Guidelines state the following:
- R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology (TA).
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty (TU) are R&D
- Systematic Investigation where the work must be structured and planned, not the result of trial and error or accidental discovery.
Examples
Even with the basic definition above. It’s still challenging for many companies and individuals to determine where R&D starts and ends. Other than “…R&D starts with a TA and ends when the TU is resolved.
Lets use a couple of true examples to showcase this
- A company that develops an App for a specific industry from “scratch” may qualify for R&D Tax Relief. The company had an idea for the product, but did not initially know how to achieve the desired outcome. To solve this, it hired technical experts (both internal and external) to achieve its goal.
- In the manufacturing sector, an R&D project might involve developing a prototype. Once that prototype is developed and ready for mass production, the R&D typically ends. Activities during mass production, such as quality assurance, are likely considered routine and do not qualify as R&D.
Record Keeping
When submitting a claim, it is essential to identify the specific part of the commercial project(s) that involves qualifying R&D. This may be a subset of a much larger development.
Documentation is more crucial than ever, given that HMRC is now reviewing approximately 1 out of 6 claims on average. Supporting evidence in a perfect world should show not only the TUs faced but also how the company approached resolving them in a structured and systematic way. RDP can assist with this throughout the interview process and the narratives we develop. During the process, we also confirm and review which contemporaneous data you may have, which includes but is not limited to time-keeping, notes, drawings, results and e-mails.
The presence of a competent professional at the company and / or someone with the qualifications / experience to understand the R&D undertaken is also important. Their input in the preparation of a claim is vital and should HMRC question the claim, provides additional support to the query process.
Next Claim Submission
Claiming R&D Tax Relief is about presenting work that is clearly within HMRC’s accepted framework. Understanding where does R&D begin and end is essential not only to securing a claim. But also to defending it should an HMRC enquiry arise. If you are unsure about where your R&D project begins and ends for the purposes of R&D, or if you have had claims challenged by HMRC, please get in touch with Jenni Little on +44 (0)208 214 1341 or [email protected]