What evidence is key to a robust R&D claim?

HMRC’s increased R&D claim investigation rate and its approach to compliance has been a hot topic for accountants and specialists who deal with the relief.

Claims of all sizes and in all sectors are being investigated to ensure compliance with the legislation.

One of the biggest changes we have seen in HMRC’s approach to the investigation process is the greater emphasis being placed on evidence to back up the claim.

It is more important than ever that accountants have early conversations with clients about how they should be recording their R&D activity and keeping hold of historic data to present to HMRC in the event of an enquiry.

What evidence does HMRC expect?

It is understandable that HMRC is looking for evidence to back-up claims.

R&D doesn’t happen by accident, and in order to qualify for the relief, an eligible project needs to attempt to extend overall knowledge in a field of science or technology and must face technical uncertainty in doing so.

This requirement faces this question from HMRC: How do you know you have extended overall knowledge and capability in the wider industry?

Usually, the answer is that the company has undertaken an initial benchmarking exercise. This may have involved attempting to procure a ready-made solution, consulting with peers and the supply chain, or researching similar technologies that could be adapted.

Unfortunately for many claimants under enquiry right now, that benchmarking exercise is not always formal or recorded. This means the proof that the company has extended overall knowledge and faced technical uncertainty is not overtly demonstrable.

Secondly, HMRC lists activities which directly contribute to R&D. They involve planning, design, testing, analysis and creation. It stands to reason that at least one of these, if not all, demands some level of correspondence, design documentation, or record-keeping.

HMRC are now regularly requesting the “contemporaneous project documents that informed and support the R&D relief claim” – i.e. records of the creation, planning, design, testing and analysis.

Finally, when compiling an R&D claim, the claimant establishes the cost of executing the qualifying R&D activity.

HMRC is checking the basis of the cost figures to ensure they properly represent the extent of eligible work.

How can accountants support clients doing R&D?

It is important to have early conversations with the companies you work with to ensure they start keeping records if they do not do so already.

Not every minute detail needs to be logged, but there are some easy practices you can recommend be implemented. These will make it easier to build a claim and defend it if needed.

1. Take meeting minutes 

R&D projects are often discussed in meetings, but the outcomes are not always recorded. It is worth the company making notes of what stage the project is in, what it is focused on, and the current challenges, testing and outcomes. These discussions capture the R&D process in action.

2. Log email correspondence

Emails about a project are commonly sent internally and externally. Companies should ensure these are logged somewhere easy to access, as they present a clear project timeline and can serve as evidence of how substantial certain challenges have been.

3. Keep activity logs

Chemical formulation, production protocols, coding iterations – all of these things can harbour technological uncertainty. But many claimants either don’t record the information or don’t keep records of failures once they have solved the problem. Yet evidence of failure is what indicates technological uncertainty — so make sure companies know to keep these logs.

4. Make project summary notes 

In the absence of formal activity logs – which might not be applicable to some projects or businesses – fortnightly or monthly summary notes can be an excellent way to demonstrate the timeline of the activity. Notes can include details of what was attempted in the recent fortnight, technological challenges faced, tests undertaken, causes of any failure, who has been involved and what planning took place for the next stage. This might take only 10-20 minutes each fortnight/month if done on time and concisely, and can make all the difference when needed.

Investigations will continue

In its bid to cut out fraud and inaccuracy from R&D tax relief, HMRC will continue to demand evidence.

Yet not all businesses have the capacity or need for detailed project logs – in reactionary start-up models with few stakeholders, for example, such activity often falls by the wayside.

Yet the record-keeping exercises listed above are realistic, implementable and most importantly valuable, and will make a difference to a company’s success in the R&D claim process.

Michael Crosson is a Specialist Tax Consultant at innovation funding specialist Catax (a Ryan company). He can be contacted at Michael.Crosson@catax.com