The tribunal ruling emphasises key pieces of legislation to be aware of when claiming R&D tax credits:
- While the R&D legislation does not stipulate what records should be kept to support an R&D claim, the tribunal case reiterates that organisations follow the record keeping principle set out in the Finance Act 1998:
“…a company which may be required to deliver a company tax return for any period must keep such records as may be needed to enable it to deliver a correct and complete return and preserve those records until the sixth anniversary of the end of the period for which the company may be required to deliver a company tax return.”
- Section 1288 of the Corporation Tax Act 2009 covering qualifying staff costs states that no deduction is allowed for remuneration if it is not paid. It further clarifies that, if the remuneration is paid beyond 9 months after the end of the accounting period then the deduction is allowed for the period of account in which it is paid.
In addition to the findings of the Teksolutions-Inc case, claiming organisations should also be aware of the Gas Recovery and Recycling tribunal ruling in relation to deferred payments: this case clarified HMRC’s position that a claim should be made once the expenditure is paid, and if payment is outside of the amendment window for the tax return no claim can be made. The tribunal judge in this case was even more restrictive in their interpretation of the legislation but HMRC have continued to apply the two year rule.
HMRC’s powers to investigate R&D claims
Although the R&D tax credit scheme is an enabling benefit that is focused on fostering R&D in the UK, HMRC still has extensive powers to check and investigate claims being made. The scale of fraud within the R&D tax credit scheme is significant and HMRC will challenge claims where they feel the claimant does not have the right to the credit. Therefore, legitimate claimants may be questioned if their claim triggers risk criteria or where HMRC are making a random check in the records for evidence of claim.
R&D claim denied: how did HMRC apply their powers in the Teksolutions-Inc case?
HMRC were concerned upon receiving the Teksolutions-Inc claim and opened a tax return check to request various items of information and documentation to check the validity of the claim. A tax return check can appear to be concerning but in most cases the claimant can resolve the questions quickly and HMRC will pay out the R&D claim.
Teksolutions-Inc did not provide that information and HMRC escalated the case by issuing an information notice under the Finance Act 2008. This sets a time limit to provide the specified information and failure to comply will result in penalties. HMRC also used their powers to contact suppliers directly to access purchase records which highlighted that none of the expenses were related to the R&D project.
Ultimately the business failed to provide the requested information and HMRC gave notice of proposed penalties. The claimant took the case to appeal at tribunal and lost: it was identified that the claimant had not paid for the expenditure being claimed; the tax return was amended to nil and the R&D claim was denied.
It should be noted that care is needed when following accounting principles and preparing a claim when the costs are accrued. Therefore companies need to record when costs are paid and ensure they have sufficient records to support any R&D claim.
What does the Teksolutions-Inc case mean for my claim?
It is difficult when starting a business to keep on top of everything. Managing you record keeping is not an optional extra and we strongly urge clients not to claim for costs that could not be substantiated. In our opinion preparing an advance assurance submission is a great way to plan for submitting your first claim as this will highlight any record keeping issues ahead of the tax return. Additionally, using an accountancy software package rather than relying on excel or physical records is a sensible step for any new business.
Within established businesses we still see issues with record keeping. Far too often there is no project record keeping and there is a lack of evidence that expenditure has been incurred exclusively for the eligible R&D project. Our expectation is that after the Teksolutions-Inc case HMRC will be querying records more often and if you are unable to substantiate an invoice within your claim this could undermine trust in your submission.
Within a group setting we see issues with group recharges being claimed without checking that the claimable costs form part of the recharge. It is not sufficient to shuffle costs between group companies when preparing the accounts if no equivalent payment is made. Additionally, when making a claim for connected party costs companies should review records to identify the relevant recharges and save this information into the claim audit file for future reference.
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