In our latest edition of R&D Tax Talk, Michael Crosson, Senior Tax Consultant, focuses on the importance of robust record-keeping by innovative companies claiming R&D tax relief.
Much has been said recently of HMRC’s increased R&D claim investigation rate. Claims of all sectors and sizes are being investigated to ensure compliance and thorough due diligence has been carried out.
There are likely several reasons for this – not least HMRC’s own estimate that claims for 21-22 accounting periods included fraud and inaccuracy totalling £469 million – an increase of £113 million from the previous period.
As well as the increased investigation volume, there seem to be some different approaches employed by HMRC during the investigation process, and here at Catax we have noticed several recurring themes.
One of these is greater importance placed on evidence to back up the claim.
It is more important than ever that want-to-be claimants record their activity and keep hold of historic data to present to HMRC in the event of an enquiry.
It is understandable that HMRC expect a level of evidence of R&D activity.
1. Firstly, R&D doesn’t happen by accident.
An eligible project needs to attempt to extend overall knowledge and/or capability in a field of science or technology, and needs to face technological uncertainty in doing so. HMRC’s question on this is: how do you know you have extended overall knowledge and capability in the wider industry? Usually, the answer is: there was an initial benchmarking exercise. This could have been attempts to procure a ready-made solution, consultation with peers and the supply chain, research into similar technologies for adaptation to this requirement.
Unfortunately for many claimants under enquiry right now, that benchmarking exercise isn’t always formal, and isn’t always recorded, meaning the proof that the claimant is improving upon the benchmark isn’t overtly demonstrable.
2. Secondly, HMRC list activities which directly contribute to R&D.
They are: creation of something needed to resolve the scientific or technological uncertainties, planning, design, testing and analysis. 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 regularly requesting “contemporaneous project documents that informed and support the R&D relief claim” – i.e. records of the creation, planning, design, testing and analysis!
3. Finally, when compiling an R&D claim, the claimant establishes the cost of executing the qualifying R&D activity.
HMRC are looking to check the basis for the cost figures in the claim to ensure they properly represent the extent of eligible work.
If you don’t already, start keeping records. Not to say every minute detail must be meticulously logged. But here are some suggestions of easy practices that can be implemented and will be so useful in building the claim and presenting to HMRC if needed.
1. Take meeting minutes.
So often R&D projects are discussed in meetings, yet this isn’t recorded. You don’t need to quantify the exact amount of time each person spoke for, but record things like: what stage the project is at, what are the current project focusses, what are the current challenges, what testing has taken place and what were the outcomes, what hasn’t worked recently and why, what might be the next steps. These discussions clearly capture the R&D process in action.
2. Log email correspondence.
Again, it’s so common that emails are traded internally and externally about an R&D project, the feasibility of potential technologies, challenges with certain iterations, or newly discovered technological barriers. Make sure to log these emails somewhere easy to access. They are an excellent reference of the project timeline and can serve as evidence of how substantial certain challenges have been.
3. Keep activity logs.
Chemical formulations; production protocols; coding iterations – all of these things can harbour technological uncertainty. But so many claimants either don’t record the information OR don’t keep records of failures once they have solved the problem. Evidence of failure is what indicates technological uncertainty. Keep these records!
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 excellent to demonstrate the timeline of the activity. Try recording such detail as: things attempted in the recent fortnight, technological challenges faced, tests undertaken and causes of failure, who has been involved, 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!
Many eligible projects are falling foul of HMRC’s desire for evidence. Not all businesses have the capacity or need for detailed project logs throughout projects – in reactionary start-up models with few stakeholders such activity often falls by the wayside. Listed above are realistic, implementable and most importantly valuable record keeping tips that will make all the difference during your R&D claim process.
If you have any further questions about how to record your activity, get in touch with us for a free discussion on this topic, the wider claim process and how we can help.