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Webinar highlights: Is your R&D tax credits claim future proofed?

How are HMRC challenging R&D tax credit claims, and how do you avoid an enquiry? In our latest R&D tax credit technical webinar we explored the importance of record keeping, complexities surrounding sub-contracting and the impact of furloughing R&D staff. 

On our January webinar, Buzzacott’s specialist R&D team discussed the implications of recent tribunals on record keeping and project eligibility, and the issues around claiming for subcontracted R&D. The webinar opened up interesting discussions for businesses both currently and planning to submit R&D claims, and proved an insightful exercise for submitting claims. 

HMRC have been gearing up their enquiry team, and are showing their willingness to take cases to a tribunal. Our R&D Director Iain Butler led the discussion, having advised a large number of small and multinational businesses on successfully claiming R&D tax relief. Our guests wanted to know which areas HMRC were focussing on, and how they could minimise the risk of an enquiry. Here, we summarise the key learnings you can take away from the webinar.

Record keeping – how important is this to my R&D claim?

From two recent tribunals, we can see that using some form of project accounting early on is the key to avoiding an enquiry. Clear invoices which can be easily linked back to the eligible projects give HMRC the confidence that the costs are qualifying. When contracts and invoices are unclear, it can be difficult to identify eligible costs, and this ambiguity may invite HMRC to dig deeper and open an enquiry. Find out more about what you can learn from the Hadee Engineering tribunal in our analysis of the case.

Subcontracted R&D – external subcontracting into the claimant vs. internal subcontracting to a third party

Subcontracted R&D is an area where HMRC often find mistakes in R&D claims. We covered two main issues during the webinar:

External subcontracting into the claimant company

The key question HMRC asks here is that if the claimant has been subcontracted, then who should be claiming? Depending on the nature of the work, for an SME, funded work would be eligible under the R&D expenditure credit (RDEC), previously known as the large company scheme. However, work undertaken at the financial risk of the claimant company may be considered as qualifying for the SME. This may result in a split R&D claim between the SME and RDEC scheme, which can be complex. If you’re facing similar challenges, we recommend consulting with an adviser.

Subcontracting to an external company

This is relatively straightforward for SMEs, but if the claimant subcontracts R&D to another company, this work can’t be claimed under the RDEC scheme. However, if the activities were externally provided workers (EPW) in nature, then a claim can be made. So how do we separate the two? As R&D advisers, we dig into the contracts and invoices to identify how the costs split, so you’re armed with the necessary evidence to justify this split to HMRC.

How do I differentiate eligible development work from a ‘bespoke’ system?

Proving your development work by only including new functions and features in your claim won’t be regarded as enough information by HMRC. They want to know what new technology you have developed in order for these to happen. You should look at uncertainties first, and then look at the technology you’ve had to create to overcome these uncertainties. Just be careful it’s not trivial customisation and is actually challenging innovation.

I furloughed development staff due to COVID-19 – will this affect my R&D claim?

Absolutely, this is something we’re seeing again and again because it can be confusing as the company will have paid those people, then received support from the government to allow staff to be furloughed. However, if your staff are furloughed, then they aren’t working on company business, so there’s no way they could be contributing to development work. Therefore, any costs associated with these individuals while they’re on furlough won’t be claimable. Visit the Corporate Intangibles Research and Development Manual (CIRD) for more information.

Why not join us next time?

We regularly organise events that will give you confidence when it comes to support around R&D, so you can improve your claim’s application and use the credit gained to invest in your organisation’s future. Join our mailing list to be the first to know about future events. For another example of the type of events we host, read what we discussed at our latest tech roundtable event.

Looking for more information?

If you’d like one of our experts to call you about R&D tax credits, please fill in the form below. Or email us to hear about other upcoming events, or pose any other queries you might have.

About the authors

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

Luke Barnbrook

+44 (0)20 7710 0955
barnbrookl@buzzacott.co.uk
LinkedIn

On our January webinar, Buzzacott’s specialist R&D team discussed the implications of recent tribunals on record keeping and project eligibility, and the issues around claiming for subcontracted R&D. The webinar opened up interesting discussions for businesses both currently and planning to submit R&D claims, and proved an insightful exercise for submitting claims. 

HMRC have been gearing up their enquiry team, and are showing their willingness to take cases to a tribunal. Our R&D Director Iain Butler led the discussion, having advised a large number of small and multinational businesses on successfully claiming R&D tax relief. Our guests wanted to know which areas HMRC were focussing on, and how they could minimise the risk of an enquiry. Here, we summarise the key learnings you can take away from the webinar.

Record keeping – how important is this to my R&D claim?

From two recent tribunals, we can see that using some form of project accounting early on is the key to avoiding an enquiry. Clear invoices which can be easily linked back to the eligible projects give HMRC the confidence that the costs are qualifying. When contracts and invoices are unclear, it can be difficult to identify eligible costs, and this ambiguity may invite HMRC to dig deeper and open an enquiry. Find out more about what you can learn from the Hadee Engineering tribunal in our analysis of the case.

Subcontracted R&D – external subcontracting into the claimant vs. internal subcontracting to a third party

Subcontracted R&D is an area where HMRC often find mistakes in R&D claims. We covered two main issues during the webinar:

External subcontracting into the claimant company

The key question HMRC asks here is that if the claimant has been subcontracted, then who should be claiming? Depending on the nature of the work, for an SME, funded work would be eligible under the R&D expenditure credit (RDEC), previously known as the large company scheme. However, work undertaken at the financial risk of the claimant company may be considered as qualifying for the SME. This may result in a split R&D claim between the SME and RDEC scheme, which can be complex. If you’re facing similar challenges, we recommend consulting with an adviser.

Subcontracting to an external company

This is relatively straightforward for SMEs, but if the claimant subcontracts R&D to another company, this work can’t be claimed under the RDEC scheme. However, if the activities were externally provided workers (EPW) in nature, then a claim can be made. So how do we separate the two? As R&D advisers, we dig into the contracts and invoices to identify how the costs split, so you’re armed with the necessary evidence to justify this split to HMRC.

How do I differentiate eligible development work from a ‘bespoke’ system?

Proving your development work by only including new functions and features in your claim won’t be regarded as enough information by HMRC. They want to know what new technology you have developed in order for these to happen. You should look at uncertainties first, and then look at the technology you’ve had to create to overcome these uncertainties. Just be careful it’s not trivial customisation and is actually challenging innovation.

I furloughed development staff due to COVID-19 – will this affect my R&D claim?

Absolutely, this is something we’re seeing again and again because it can be confusing as the company will have paid those people, then received support from the government to allow staff to be furloughed. However, if your staff are furloughed, then they aren’t working on company business, so there’s no way they could be contributing to development work. Therefore, any costs associated with these individuals while they’re on furlough won’t be claimable. Visit the Corporate Intangibles Research and Development Manual (CIRD) for more information.

Why not join us next time?

We regularly organise events that will give you confidence when it comes to support around R&D, so you can improve your claim’s application and use the credit gained to invest in your organisation’s future. Join our mailing list to be the first to know about future events. For another example of the type of events we host, read what we discussed at our latest tech roundtable event.

Looking for more information?

If you’d like one of our experts to call you about R&D tax credits, please fill in the form below. Or email us to hear about other upcoming events, or pose any other queries you might have.

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