There is a great difference between fraudulent claims and erroneous claims, but they will both result in innovative companies missing out on vital R&D tax relief.
As HM Revenue and Customs (HMRC) clamps down on noncompliance and problems in filings, it is worth understanding the most common mistakes that disrupt claims.
Even if these mistakes do not derail the entire claim, they will make it harder to defend should the claim be targeted for the Mandatory Random Enquiry Programme (MREP).
Poor record-keeping
When it comes to ascribing costs for the time spent working on an R&D project, the biggest problem that holds businesses back is a lack of paper trail supporting the work being conducted.
As competent professionals are unlikely to devote their entire time to one single R&D project, understanding the amount of time they work on each project is vital for accurately determining employee expenses.
This also includes the amount of time other people spent working on the project, as this plays a key role in deciding your qualifying expenditure.
Similarly, if you seek to consider some intangible costs, like power and water, knowing how much of your standard energy bills were a result of R&D work will allow for a more accurate consideration of cost.
As employee time and the utilisation of electricity are often difficult to prove and tend to be estimated, your client can expect HMRC to target these during an MREP if they seem uncharacteristically high.
You can assist your client by advocating for the compilation of accurate records that mirror the documentation of other activities in their business.
These documents should include when work began on the R&D project and when it finished, which will be of particular use if the project spans multiple accounting periods.
Not filing the correct documents
It should be second nature to you by now, but your clients may be less familiar with the need to submit the required documentation to allow their R&D tax relief claims to be accepted.
The Advanced Notification Form (ANF) needs to be submitted within six months of the end of the accounting period wherein the R&D work took place.
Do not hesitate to remind your clients of the need to prepare and submit this form otherwise, the claim will be automatically rejected when they attempt to submit.
All submissions must also have the Additional Information Form (AIF) completed as well.
This is likely to mirror much of the information from the R&D report, but serves as HMRC’s way of standardising the acquisition of information to ensure that the quality is more consistent.
Miscalculating eligible costs
A general lack of awareness around the guidance means many clients do not fully understand what is and isn’t eligible.
This results in consumable costs being neglected, which can significantly impact the overall claim.
Any item used in testing that is destroyed or changed to the point where it cannot be commercially sold counts as a qualifying expenditure and should be considered for an R&D tax relief claim.
A portion of the energy costs that were used to ensure the R&D work could take place are also commonly missed.
Software costs are particularly subject to nuance and thus often get miscalculated.
When used directly for R&D activity, such as CAD software, the software does not need to be transformed to be considered qualifiable.
When software serves the dual purpose of being used for R&D and standard business practices, then a portion of the costs can be eligible in the same way that energy costs and employment costs are calculated.
As this may seem intimidating for some clients, these costs could be missed, resulting in lost relief.
However, some clients may wish to include ineligible costs.
These will typically centre on aesthetic changes or tweaks to improve marketability and thus are not connected to innovation.
Market research and routine maintenance should be excluded, along with any activity that is a standard part of business operations and would be conducted regardless of the R&D project.
Having a thorough understanding of what can and cannot be included is vital for maximising any R&D tax relief claim, but is especially vital for loss-making SMEs wishing to make use of the ERIS scheme.
As the ERIS Scheme requires a minimum of 30 per cent expenditure on R&D, knowing what can or cannot contribute to that is essential.
Avoiding mistakes comes with experience, and we have the experience to maximise your clients’ compliant claims.
We would always recommend seeking professional assistance if you or your client is ever uncertain about any aspect of the R&D tax relief process.
Let randd uk help your client secure vital funding. Contact our team today!
