R&D tax reliefs offer a significant incentive to innovative businesses seeking to reduce the financial burden of investing in cutting-edge industry developments and addressing key challenges facing the UK’s R&D output.
You may well have clients that rely on the significant benefits provided by a successful tax relief claim – but this is getting harder to achieve.
The problem HMRC is facing
Research emerged last year from HM Revenue & Customs (HMRC) that identified a rise between 2015/16 and 2020/21 in claims and the total value of claims made, by 105 per cent and 65 per cent respectively.
As a result, HMRC is seeing a significant rise in the cost of delivering the R&D relief scheme.
~This cost is in line with the overall aims of the scheme, namely accepting an initial loss for the public coffers in order to boost high-growth sectors which, in turn, generate more tax revenue and investment long term.
However, this rising cost has made HMRC more concerned with compliance, with a substantial number of claims now being disputed – and up to 25 per cent being fully dismissed due to no evidence of qualifying R&D.
This is often due to businesses being misled by uninformed or unscrupulous R&D tax advisers into submitting claims where one is not due, which has created a difficult situation for those businesses.
What makes a good claim?
A successful and compliant R&D claim is a fine art, which is best achieved by a specialist.
One of the most significant elements of a successful submission is identifying and describing activity that qualifies as R&D and is, therefore, eligible for tax relief, both within the data provided in a CT600 form and via the technical narrative included in the Additional Information Form (AIF) and supporting documents.
The major issue facing R&D-conducting businesses is that R&D as a term is somewhat flexible and can be stretched or constricted to include or exclude any number of projects.
It is, therefore, important to fully understand and clearly describe how a particular project meets the qualification guidelines under the scheme, including:
- How a project seeks to make a meaningful advance in the field – including how the current market or field lacks a certain advancement or has failed to produce it in the past.
- How a project overcomes or attempts to overcome a challenge within a technological or scientific sector.
- How your client’s specific work adds or grows expertise in the field and why this challenge could not be easily addressed by existing knowledge.
- How a project aims to develop a new product or process or improve an existing one.
Ultimately, a good R&D relief claim demonstrates why HMRC should use some of its resources to support your client and its work and how this will be beneficial to the sector and to HMRC in the long term.
The right competencies
Building a compliant R&D tax relief claim begins with how a team conducting R&D defines the term internally.
It is important that those working on the project and those working on the claim submission are supported by a Competent Professional – an individual with sufficient expertise in the sector to identify work that genuinely addresses an uncertainty based on:
- Knowledge of the relevant scientific and technological principles involved
- Understanding of the current state of knowledge within the sector
- A successful track record of working within the field
A Competent Professional must work within the scope of the R&D project. For example, an accomplished civil engineer cannot act as a Competent Professional on a software development project, despite having a good general understanding of R&D and innovation.
On a technicality…
Data from HMRC also estimated that, in two per cent of analysed cases, non-compliance stemmed from an attempt at a genuine claim, but with a misinterpretation of the legislation.
A successful claim goes beyond ensuring that all activities qualify for the relief and requires significant attention to detail with regards to the technical requirements of the submission.
For example, we recommend working with an R&D specialist to ensure that all requirements are satisfied with:
- The Additional Information Form (AIF), which provides supporting details of the claim to HMRC.
- Advanced notification of a claim, particularly when your client is submitting for the first time.
Keeping claims on track
With HMRC placing an increased emphasis on compliance, it is important that your client has access to sufficient expertise in the R&D space to maximise the support offered by tax reliefs.
When assessing claims, HMRC wants to see more than evidence of your client’s activity. A successful claim will demonstrate innovation and a genuine commitment to solving a problem or addressing an uncertainty.
For support with preparing clients’ R&D relief claims, contact the randd uk team today to speak with one of our R&D experts.
