If you have been involved in the preparation of R&D tax relief claims then you will probably be aware of just how complex this can be in all but the smallest and simplest of claims. If you are thinking about making a claim for the first time then you are about to find out!
In the absence of outsourcing the work to the company’s external accountant or other specialist adviser, the preparation of the claim usually becomes the responsibility of the finance team.
For companies not able to claim under the SME scheme there is now the choice of one of two schemes to claim under.
1. Start with understanding the R&D projects you are carrying out and then look at the activities involved and the associated qualifying costs. This way you will build your claim fully and robustly from the “bottom up”.
2. Identify and involve the key members of the scientific and technical staff at the beginning of the claim preparation process so that they can identify the qualifying projects and all the associated activities and qualifying costs.
3. Ensure the company’s scientists or technologists really understand the definition of qualifying R&D for tax purposes so that they are in a position to be able to correctly consider all the potentially qualifying projects.
4. For each project you should be able to demonstrate how the project qualifies according to the criteria laid out by HMRC. What is the scientific or technological advance that the project is seeking and what are the scientific or technological uncertainties that you are resolving as part of the project? If HMRC enquire into the claim then they will require this information. Many companies present this information as part of the tax return and do not wait for an enquiry. If you are claiming a payable tax credit then this could ensure that this is received as soon as possible.
5. You will need to understand the range of qualifying costs applicable to each of the three schemes. It seems an obvious point, but where claims are prepared where the basics and the many complexities have not been properly understood, it leads to amounts being under-claimed or the potential for a penalty to be levied by HMRC for an incorrect tax return where non-qualifying amounts have been included.
6. Ensure your financial systems are capable of generating the information required to complete the R&D claim process in a more timely manner. This is something that many companies are starting to do. Larger companies will often seek to calculate and track the likely size of the R&D claim as the year progresses for management accounting and reporting purposes. For SMEs that perhaps rely on a speedy claim process and payment of any tax credit, the ability to speed up the preparation and filing cycle is crucial.
7. Consider whether obtaining an independent review of your claim and the preparation process could be productive. The legislation and practice around R&D tax relief has changed frequently over the years. The use of a “standard” process involving a spreadsheet model, and standard inputs used from year to year may not optimise the claim and can introduce errors. In practice the R&D process will be a moving feast with the nature of the activities, the various parties involved and the associated costs changing over time. These, and the complexities of the reliefs, need to be understood if you are to make the most of the intended benefits afforded by the legislation.