10 Mistakes Companies Make When Creating an R&D Claim
As the number of Research & Development Tax Credit Claims continues to rise (up a huge 16% from 2019-2020), it’s no surprise that the number of mistakes businesses make is also growing. HMRC have even hired an additional 100 Inspectors to help approve and look into possible fraudulent claims.
So, as the numbers shoot up, how can you make sure your
claim is successful? And what are the common R&D claim mistakes
businesses are making? We’ve outlined the top 10 below…
1. Show that you’ve followed the R&D guidelines.
While your claim will include your R&D activities, HMRC will want to see how your activities relate to the R&D guidelines from BEIS. Pay close attention to the BIS Guidelines and CIRD Manual when creating your claim to make sure you follow their guidelines and use the right terminology.
2. Not explaining a big increase in R&D spend from one claim to the next.
While you can submit an R&D claim that’s a lot higher than your previous one, it’s vital that you include why there’s been such a big increase as part of your technical report. HMRC have invested in their own software (called ‘Connect’) to help flag any steep rises in the amount of R&D a company is claiming (compared to the previous year). So if you haven’t explained the rise, they’ll likely make an enquiry into your claim.
3. Not submitting enough supporting documents.
HMRC have been known to be more lenient when reviewing record-keeping documents (e.g. invoices, bank statements, payroll, receipts etc.) for businesses that are making their first claim. If it’s your first claim, they’ll be aware that you’re new to the process and that your record-keeping may not be at its best. But… if this isn’t your first claim you need to make sure that the documents you submit are on point. Your R&D specialist can work with you to figure out what records you have available and to create a plan.
4. Not excluding non-qualifying R&D activities.
While you’ll need to highlight R&D activities in your claim, you should also show which activities you’ve excluded. Why? Because not every activity that’s part of your R&D project qualifies for a claim. While they’re typically involved in R&D projects, costs for things like commercial activities, market research, maintenance and routine testing can not be claimed back. It’s important you show HMRC that you’re aware that these can’t be included in the claim and that you’ve excluded them.
5. Not submitting a technical narrative.
You don’t have to write a technical report for every single
R&D activity, but you should try to provide technical details on at
least 50% of the R&D costs being incurred. The amount of detail you
need to include depends on how much you’re claiming - the more money
you’re claiming, the more detail you’ll need to include. If enough
technical details aren’t included HMRC may open an enquiry into all of
your previous claims, so it’s worth getting this right!
6. Not identifying a ‘competent professional’ (or lack of detail to support their skills & experience).
As part of your claim you’ll need to include details on a ‘competent professional’; someone in your business with a high-level of relevant experience, skills or qualifications relating to your R&D claim. For example, if you’re developing a new piece of software, your competent professional will likely have a software engineering background. Your competent professional can then support your claim that this new piece of software is an R&D project.
Add detailed biographies including any academic or relevant work experience to show HMRC how your competent professional can be classed as an expert in this field.
7. Subcontracted R&D activity and subsidised R&D spend.
The most common query HMRC makes into claims is around whether the company claiming was carrying out subcontracted R&D i.e. whether the money the business is trying to claim tax relief on, has been subsidised. If your business is working on customer-led R&D projects, it’s increasingly important to show that the work has not been subsidised and that costs have not been met by another party, or you could end up receiving less than ⅓ of the benefit you were expecting.
8. Incorrect treatment of grant income and other State Aid.
Since the COVID-19 pandemic more and more SMEs are receiving some form of State Aid (e.g. CBILS, CLBILS or BBL). As R&D tax relief is also a form of State Aid, businesses that are already claiming some type of Aid, may find that this could reduce the amount of R&D tax relief that they can receive.
9. Not enough details on the ‘Uncertainties’ and ‘Advancement’.
A lot of businesses don’t provide the right details when it comes to the ‘Uncertainties’ and ‘Advancement’ part of the claim. This is where you need to prove that your work can benefit the wider community or field, not just your company and that you took a risk in doing so e.g. you weren’t 100% certain it was going to work or you met some challenges along the way.
You need to focus on the scientific or technological side
of things here, but a lot of people make the mistake of including
commercial details instead. This is where it can be really valuable to
work with an R&D specialist.
10. Not thinking strategically when preparing your accounts.
If you’re thinking of claiming R&D tax credits now or in the future it’s important that your accountant is aware so they can plan for this when preparing your accounts. For example, if you’ve spent a lot of time and effort developing a prototype your accountant could think that it makes sense to make the most of this and treat them as what’s called a ‘tangible fixed asset’. But, from an R&D tax perspective this would then mean that your prototype can’t be included in your claim.
R&D tax relief is a vital lifeline for many businesses,
so it’s important you work with a qualified specialist to build and
maximise your claim.