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Research & Development claims: Top tips

Andrew Hawley, Director, Corporate Tax and Stuart Weekes, Partner, Corporate Tax
14/01/2020
Drone

Our first Innovation Insight of the year looked at certain triggers that may indicate a company is carrying out qualifying R&D activity. We now turn our attention to when a company has identified qualifying R&D activity and have highlighted some top tips when preparing a claim.

  1. Work out how big you are – for R&D tax relief purposes a company will either be an SME (small or medium-sized enterprise) or ‘large’. This will help determine whether your company can claim under the SME scheme or the less beneficial RDEC (Research & Development Expenditure Credits) Scheme. Note there are instances where an SME will not be able to claim under the SME scheme, and working this out can be difficult, especially where there is a complex ownership structure in place i.e. the business has private equity investment.

  2. Contracts with subcontractors/agency type staff – where you subcontract out certain elements of an R&D project or use agency type staff you should take care to ensure the contracts are set up in a way that gives you the maximum chance of including such costs in an R&D claim assuming this is commercially viable. How the contracts are structured, who the parties are to the contract, and how the commercial reality of the relationship is reflected in such contracts should be considered carefully.

  3. R&D project funding – be aware that grant funding for R&D projects, or subsidies received to assist with R&D projects from customers or others could reduce or remove completely the benefit available through making an R&D tax relief claim. Make sure  you understand how this might impact your claim before making grant applications or accepting subsidies.

  4. R&D supporting narrative – ensure the length of the supporting narrative is reflective of the monetary size of the R&D claim. There is no need to produce a huge report for a reasonably modest claim. Although it is important the supporting R&D narrative covers key areas.

    The narrative needs to demonstrate what the technological/scientific advances were and how the related challenges and uncertainties were overcome. It therefore needs to be written from a technical perspective. However, a non-technical person needs to be able to understand it so context is required and technical jargon should be avoided.

    Do also include unsuccessful projects that failed from a technological or scientific perspective as this helps to demonstrate to HMRC that a project was not straight forward.

  5. Qualifying costs – be clear at the outset on the type of costs that can be included in the R&D claim. Although some costs will be easy to identify others will need additional thought as to whether they fit into the HMRC definition of a particular cost category.

    Also remember that qualifying costs that are capitalised (included on the balance sheet) also have the potential to be included within a claim.

    When it comes to the proportion of costs you can include this will also need careful consideration in how they link in with the qualifying activities undertaken. For example, it is advisable to have a timesheet system in place to support the proportion of employee costs being included in the claim.

  6. Tax losses – where an R&D claim creates additional tax losses you should consider the most beneficial way to utilise these taking into account factors such as profits and losses from other group companies, interaction with capital allowances, future financial forecasts, the immediate cash requirements of the business, and any losses brought forward from prior periods. This will help ensure you maximise the utilisation of any R&D tax relief benefit based on the particular circumstances of your business. 

  7. Prior year R&D claims – where you have not previously made an R&D claim remember the ability to make claims in prior years will still be open for up to two years after the end of the relevant accounting period. In addition, even where a claim has previously been made, you can also amend the claim in the same time period. For instance you may discover additional costs that were missed out of the original claim.

  8. Record-keeping – ensure you have adequate records to back up the R&D claim contents. Although there is no specific HMRC record-keeping requirement there is a general requirement to keep sufficient records that back up your R&D claim in the event HMRC require additional information. It is of course also best practice to maintain such records. Think about introducing workable processes, including a basic timesheet system to enable R&D staff to record the time that they spend on R&D projects.

  9. Employee understanding and involvement - ensure that employees who are involved in R&D projects understand how R&D claims can benefit the business and that claims may be submitted based on the projects that they are working on. Educate them on the process and what is included in a claim so they can think about, and document where possible, key advances and challenges in real time. Also consider having a real time process in place to help them identify from the outset whether a project has the potential to qualify.

  10. Accounting treatment – before finalising the accounting treatment of R&D costs in your annual accounts ensure you understand the implications this has on an R&D claim. Sometimes there may be flexibility in how R&D costs are treated for accounting purposes which result in different outcomes from an R&D tax relief perspective.

  11. R&D for overseas parent – where a UK company undertakes R&D for its overseas parent company and is remunerated for doing so (for example on a cost plus basis) care is needed to ensure the arrangements do not prohibit an SME R&D claim being made. Specifically there could be a risk that the activities being carried on by the UK Company are being contracted out by the parent, or that the R&D is being subsidised by the parent. Such arrangements require thorough review to ensure an R&D claim can be made and it is made under the correct scheme.
  12. Hopefully you will have found these tips helpful when thinking about your R&D claims but the above is no substitute to getting the input of a specialist R&D advisor with years of practical experience in making claims. Therefore if you need support with your claim, have specific questions or would just like to chat through your thinking please do contact Andrew Hawley or Stuart Weekes,

Contact us

Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley