Avoiding costly mistakes: How good record-keeping can help secure your R&D claim

Splitting direct and indirect costs

One of the largest changes to the scheme is that HMRC is moving to a system where the costs need to be linked back to the eligible projects. This can be on an apportionment basis, but it will only accept claims with a split from August 2023 onwards as its new digital form forces businesses to provide this breakdown.

Therefore, HMRC will expect to see the amount of expenditure incurred in each project. This must be split into the expenditure of quantifying direct and qualifying indirect activities that have led to resolving the uncertainty. 

What costs do you need to split out into the direct and indirect cost categories? Qualifying indirect activities may include:

• R&D support such as compiling a report of R&D findings.
• Maintenance, security, administration and clerical activities and finance and personnel activities, for the share that relates to eligible R&D project.
• Undertaking training required to support the R&D project.
• Ancillary activities needed to undertake R&D, for example taking on and paying staff, leasing laboratories and maintaining R&D equipment, including computers used for R&D purposes.
• Research to devise new scientific or technological testing, such as surveying or sampling methods. 
• Feasibility studies to inform the strategic direction of a specific R&D activity.

Whereas, qualifying direct activities may include:

• Creating or adapting software, materials or equipment needed to resolve the uncertainties.
• Testing and trials to resolve the technological or scientific uncertainties. 
• Product design process and development.
• Prototyping and clinical tests.
• Improving process of product.
• Planning activities to resolve the technological or scientific uncertainties.

Tracking work undertaken by qualifying staff and contractors

A key question HMRC is asking during the course of a compliance check is what activities the staff and contractors were undertaking on the eligible project? This might seem like an easy question to answer when the work is ongoing, but it can become more of a task when asked to recollect the exact description of their role in the eligible project a year later. If a company does not record this information as the claim is prepared, it may prove very difficult to respond to an HMRC query later down the line. This could be the difference between providing a strong response to HMRC challenging the validity of your claim, or a weak response that is generic and lacking in detail. Therefore, maintaining up-to-date records and creating claim audit file at the time of submission is becoming more and more important.

Why is record keeping important? 

With the recent changes to legislation, the claimant company will be taking on much more responsibility than was previously done where the responsibility lies with you. Therefore, HMRC will expect to see a robust record of what was undertaken during the project. 

Good record keeping can dramatically improve the R&D claim, increasing both its robustness and value. Records of time and money spent on research are an essential underpin of any R&D claim, and you will need to be able to credibly show to HMRC the amount of money you have spent. Therefore, your claim must account for all qualifying expenditure, and be able to link back to the accounts. Record-keeping will help to show a systematic approach to the R&D undertaken, which should demonstrate any innovations that were made were the result of a planned R&D project. Ultimately, the benefit of good record-keeping is a better-quality claim. This often means more qualifying expenditure can be identified to increase the claim benefit, while reducing the chance of HMRC querying your submission or opening an enquiry. 

Tips for good record keeping: 

• Your ‘project’ must be clearly defined and should be visible within your records. For example, noting the project name in invoices or project planning will help create a contemporaneous record trail. 
• You must have a record of a robust and auditable claim methodology. Initially, it might be reasonable to rely on estimates to determine the eligibility of staff time and subcontractor costs. But overtime there need to records that can support your claim. For example, can resourcing schedules or product roadmaps be enhanced to provide a record of the timings for project activities or resourcing needed across the year? HMRC accept that SMEs may not have a detailed time writing system, but they are being far more challenging over the reasonableness of any claim during compliance checks. 
• You must understand the nature of any relationships with third parties. Interaction with third parties can impact R&D claims in a number of different ways, such as funding or contracted work. To ensure that the costs are claimable, you will need to ensure that the contracts have been drafted to clearly illustrate the relationship between the parties.
• It’s important to have evidence in respect of the underlying expenditure incurred. This should include contemporaneous evidence such as contracts and invoices that link back to the work being claimed.  
• Ensure that the records are fully accessible and kept in a secure, structured fashion. It’s important to ensure that the records are accessible and can be tracked back if HMRC requests any further information.

How we can help

We have found that many businesses are not prepared to deal with the changing legislation and rise of HMRC actively challenging claims. It’s not uncommon for businesses to be unable to provide supporting evidence that links the R&D activity to the underlying expenditure incurred when requested by HMRC. 

If you‘re unsure whether your R&D claim is prepared sufficiently for the upcoming changes, our specialist advisors can help you evaluate your claim. We’ll work closely with you to gather all the necessary information and documentation to support your claim. Our team will then prepare a detailed R&D report based which will provide a full breakdown of expenditure split into eligible projects to build you a robust claim. Ultimately, our aim is to ensure that your claim is compliant with HMRC’s needs and that the submission process is as smooth as possible. Should you receive a compliance check letter from HMRC, we will work with you to prepare a strategy to minimise your potential exposure to unnecessary tax, interest, and penalties.

Get in touch

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