Innovation keeps the UK at the forefront of today’s ever-changing world and one step ahead of global competition. But it is a costly business and the Government recognises that through its Research and Development (R&D) Tax Credits scheme. This rewards business innovation by allowing additional corporation tax relief and/or cash refunds on qualifying expenditure incurred on innovation and R&D activities.
These incentives can be exceedingly valuable for businesses investing in the development of new products and processes – up to 33 pence of every £1 of qualifying expenditure can be claimed. This provides a welcome reduction in corporation tax liability or a much-needed cash injection to further invest in R&D, to support growth, to improve cash flow and to reduce risk.
However, many businesses eligible to make an R&D claim are either not claiming or are not fully maximising their entitlement.
Our research shows that this is because they are increasingly becoming concerned about making an R&D claim because of the perceived risk of HMRC making enquiries into claims.
Companies tend to dread the HMRC enquiry process for a variety of reasons, not least its daunting, complex nature and also the very fact that it can be so time consuming and disruptive.
Through discussions with HMRC, we have identified eight major reasons why HMRC may enquire into a company’s R&D claim:
- Lack of supporting documentation/explanation to identify the company’s qualifying R&D activity and more specifically:
a) What was the scientific or technological advance?
b) What scientific or technological uncertainties were encountered?
c) How and when were the uncertainties overcome?
d) Why wasn’t the knowledge being sought readily deducible by competent professionals?
- The costs included in the R&D claim are more than the costs allowable for tax purposes and included in the company’s accounts
- The correct apportionment/restriction being applied to subcontracted expenditure and expenditure incurred on externally provided workers
- The percentage claimed for qualifying R&D activities undertaking by staff or subcontractors not supported by the R&D activities undertaken by the company.
- All employees in the company listed as being involved in the company’s direct R&D activities, especially applicable to companies who are making sales from existing products
- Incorrect claim methodology used
- Errors on the filing / amendment to the tax returns
- An assessment of the compliant R&D activity not being made by a competent professional within the business
Given that tax inspectors at HMRC can open an enquiry – even if the R&D claims have been processed and the company has received the tax benefit – it should concentrate minds into making absolutely sure the claim is rock solid.
Making an R&D Tax Credits claim is not necessarily a skill possessed by innovative companies who wish to utilise the valuable time of key staff members on core business, not administration, despite how productive it might be. Because making an R&D Tax Credits claim which is fully maximised and robust is a complex task, companies should use a specialist R&D consultant which has significant experience in the field and a proven track record of successful claims.
If HMRC does make an enquiry into a claim and has been resolved, the outcome is usually one of the following:
- R&D claim processed with no amendments
HMRC is satisfied that the company is undertaking qualifying R&D activities and that the qualifying R&D expenditure claimed supports this.
- R&D Claim processed with adjustments made to the original submission leading to a reduction in R&D claim
HMRC not satisfied that all the costs claimed, and the projects included in the R&D claim qualify, therefore the R&D claim is reduced or removed from the R&D claim accordingly
- R&D Claim rejected
HMRC is not satisfied that the company’s projects meet the qualifying conditions and the R&D claim is rejected. If significant issues are found, this can often lead to a penalty from HMRC.
- R&D claim processed with no amendments
The first option is the perfect outcome, the second is workable but not so perfect, and the third might well be a disaster and lead to all sorts of repercussions and recriminations.
That is why R&D Tax Credit claims must be 100 percent watertight and why businesses seeking peace of mind that their innovation will ultimately be rewarded should really ask for help from GovGrant’s experts.