Current update in relation to HMRC practice and claims
HMRC’s aim is to scrutinise all companies’ R&D claims at least once every three years. This means that just because a research and development (“R&D”) claim is initially accepted it does not mean HMRC will not later review/enquire into it.
We have experienced a higher level of scrutiny from HMRC on R&D claims; in particular on software claims.
HMRC have their own technical teams to review R&D claims from the perspective of a ‘competent professional’. Therefore sufficient evidence needs to be provided with R&D claims to demonstrate the advances being undertaken.
Given this increased scrutiny it is important to ensure a record of claimed figures is robust and a technical report is drawn up with clear evidence to demonstrate R&D is taking place.
We have recently seen more questions in relation to the ‘boundaries’ of an R&D project i.e. the start and finish dates of actual R&D activity. HMRC are focused on discerning when R&D commences (e.g. once a specific project is decided upon).
The following would not qualify as R&D activity:
- Deciding what projects to pursue; and
- Researching gaps in the market, or avenues for development.
This is because they do not relate to resolving any specific scientific or technological uncertainty.
It is equally important to determine when R&D finishes; R&D would end once any uncertainty in how to develop a product has been resolved.
Taxpayers should bear these boundaries in mind when calculating the costs associated with their R&D projects, those costs falling outside of the boundaries will not qualify.
Timing of repayments
During 2019, HMRC’s R&D team experienced long delays in processing R&D claims, and we are still seeing delays for large company RDEC claims. Whilst HMRC aim for a 28 day turnaround of SME R&D claims, in practice this may be longer during busy filing deadline periods.
So how can you mitigate the risk of increased scrutiny and delays?
If your SME business is reliant on a speedy turnaround of your R&D tax credit, any delay could cause significant cash-flow issues. An enquiry by HMRC into a claim could last months and incur additional fees to manage the dispute.
By submitting a technical report with the corporation tax return, a company can help reduce the chances of HMRC asking queries into the claim and thereby delaying it being approved.
Ideally, the report should:
- Outline for each project how it meets the criteria to be considered R&D, and the costs associated with it.
HMRC are not looking for weighty volumes covering all aspects of the projects in question, or a detail incomprehensible to a layman, but the report should be sufficient to emphasise why the work was innovative.
- Be updated and improved on an annual basis.
A sound approach is to develop a background that can be updated easily with work done during the relevant accounting period.
- Highlight developments in projects spanning multiple years; HMRC are looking for evidence of ongoing R&D activity.
Currently, loss-making SMEs can surrender their R&D losses for a tax credit from HMRC. For many start-ups this has meant the difference between failure and success.
Unfortunately the government has proposed to introduce new legislation in April 2020 capping the repayable credit to three times a claimant company’s total PAYE and NIC, we believe in order to combat perhaps more aggressive claims made by some companies claiming this repayment.
But what about those companies with minimal employee costs and genuine R&D activity?
HMRC’s current stance appears to be – “tough” – we shall have to await their final verdict once the actual legislation has been released in the upcoming budget.
Impact of Brexit
It might seem an unusual step to open up the public purse in such uncertain times, and one could not be faulted for assuming the government might intend to limit some of the R&D provisions. However, it is felt that this is unlikely to be the case.
A key priority for the UK will be to encourage new start-ups and tech-leaders to set up shop here – and a way to achieve this is to offer incentives, which will include R&D. One could infer that the current UK offering may not be sufficient to attract big names, as evidenced by Tesla’s choice in a new German factory, so given this we are unlikely to see R&D tax relief leave us anytime soon, and indeed might even expect some enhancement to the existing schemes to attract industry to the UK.
A greener future
We also ought not lose sight of the bigger picture, and could expect to see at least some incentives for ‘greener’ technologies.
A new uplift to R&D for projects revolving around new or more efficient renewable technologies would come as a welcome incentive to the Renewables sector.
For more information
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