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How to prepare for your R&D tax credits claim?

It’s probably not your favourite way of spending time…but laying the groundwork for an R&D tax credits claim is a vitally important task for your business.

Fortunately, once you have completed that preparation, randd are available to ease the stress and to liaise with HMRC on your behalf.

Whether it’s your first time submitting a claim for the Research and Development work your company has undertaken, or you are already conversant with the process, there are certain boxes you need to check.

Firstly, be certain you have identified the correct areas of your business expenditure for which you want to claim, and ensure your accounts are up-to-date and accurate.

The R&D costs for which you can claim are:

  • Staff wages and other related costs
  • Payments made to sub-contractors and external workers
  • The cost of materials consumed
  • Software licensing costs
  • Payments to clinical volunteers
  • Light, heat and power costs

However, there are notable exclusions from the qualifying criteria, e.g. money spent on fixed assets such as land and buildings; meal and travel expenses paid directly by the company; shareholder dividend payouts; recruitment and referral costs, including of R&D staff; and costs of items used in production.

How to determine which R&D costs are eligible for a claim

Included are staff costs and sub-contractor costs depending on the nature of the sub-contractor agreement and what they have contributed; consumable items, i.e. the cost of materials – but they must be used in a certain way so they are no longer fit for their original purpose, or have been consumed as part of a functioning prototype for the R&D purpose.

An allowance exists for utilities and for travel and sustenance expenses, provided they have been paid for by the employee and repaid by the business. Software programs can be included but not IT licensing, server and hosting costs which are all deemed to be day-to-day business requirements.

Once you have everything in order, you need to decide how to go about making your claim – and this is where randd come in.

How can randd help you with your R&D tax credits claim?

By working with you, we will produce a detailed technical report – this is the key document explaining which R&D activities were undertaken, the scientific or technical challenges the R&D helped to solve and how the activity meets the current legislation.

Payroll records for relevant employees should be provided to us in order to establish the associated costs and the tax paid towards the project.

There is also other information you can supply during our initial meeting which would reduce the need for follow-up conversations, saving you time which can be focused on your business.

For example:

  • An in-depth technical review of the work carried out– If it was of a technical nature, you will need to involve the project lead or competent professional either by providing a written overview of the project or including them in the meeting
  • A timeline of events relating to R&D – The month and year the R&D started, everything in between and the solution timeframe
  • Confirm which personnel worked on the project– Regardless of whether they are internal employees or external sub-contractors, the time they spent on the project, and their associated salary costs, will need to be documented
  • The challenges overcome– Confirm why the challenges faced could not be solved easily with an existing process or an ‘off the shelf’ system
  • Other costs– The materials purchased/consumed, and did the project require any prototyping to provide a proof of concept?

What recent changes have been made to the R&D tax credits system?

If you have made a claim previously, or merely looked into the process, it is worth being aware of the changes that were introduced to the R&D tax credits scheme in 2023, which included adjustments to the rates of relief depending on the size or profitability of the business.

Also, it was mandated that first-time claimants now had to pre-notify HMRC if they intended to submit a claim – and to do so within six months of the relevant financial year-end. The notification must also state if an agent, such as randd, is being utilised to make the claim – although we have always disclosed our involvement to HMRC in any case.

And in the future, there will be geographical limitations incorporated into R&D tax credits claims.

That is one of two significant changes the government is due to implement to the process from April 2024, at which point any sub-contracted work that has been brought in to support R&D projects from anywhere outside of the UK is no longer accepted, which will impact companies that have technical capacity in places such as India or Bangladesh, for example.

Additionally, there will be changes regarding a reduction in how the claim itself can be calculated, to the extent of around a third on what the generosity of the claim is currently.

There are also some extensions to the IT costs criteria to include datasets and cloud computing, while R&D in pure mathematics will also qualify.

What else do I need to consider?

One thing to bear in mind, despite it being unpalatable, is that HMRC can potentially issue penalties of up to 25% for careless overclaims – an amount which, if imposed, could essentially wipe out your reimbursement.

Therefore, the expertise of a specialist such as randd is invaluable to avert any chance of that prospect or, at the very least, of your future claims being the subject of increased scrutiny.

It is also worth remembering that companies making claims after August 1st 2023 must provide a digital additional information form, supporting HMRC’s compliance work.

If you would like to enlist randd’s help with making an R&D tax credits claim, call 01332 409 711 or email claim@randduk.com