HMRC recently reported on the outcome of a first-tier tax tribunal case investigation into an R&D tax claim, in the case of Hadee Engineering Co Ltd (Hadee). Hadee made R&D claims for the periods ending 30 April 2009 and 30 April 2010. HMRC challenged the claims asking if the expenditure was incurred in the relevant periods, whether the projects qualified as R&D under the BIS guidelines and whether the expenditure was incurred as part of a contract and whether the expenditure had been subsidised.
In reviewing this tribunal report we can point to some key findings.
Five reminders when claiming R&D tax relief
- Be clear about the beginning and the end of any R&D
- Evidence, evidence, evidence
- Where does the risk of uncertainty sit?
- What is the baseline?
- Be consistent
It sounds obvious but a claim needs to have a clear start date for any R&D and ensure that any costs incurred before that are excluded from the claim. Equally, there needs to be an endpoint, when the uncertainties have been resolved and the project moves into a production phase.
This case clearly demonstrates how important documentation is to be able to support a claim. A company has a duty to retain relevant records to substantiate the claims and where relevant make those records available. HMRC will review contracts, emails, and invoices as part of their enquiry.
It is important to be clear about who is holding the risk of uncertainty as that will indicate who was carrying out the R&D. Be explicit in the contracts that are put in place for work being subcontracted out or that is being done by you on behalf of a customer. Contracts should clearly state exactly what is being paid for, where the design is being done and who will own IP.
To demonstrate that R&D has taken place there needs to be some evidence of which solutions were available, why they didn’t work and showing that enough work had been done to explore a solution before embarking on a project. To demonstrate R&D has taken place there needs to be an advance in the field which raises the overall knowledge above this baseline.
Being able to demonstrate that a patent search has been carried out can be very helpful. The pre-existence of a relevant patent would indicate that the significant uncertainties have already been overcome.
This case also demonstrates how important it is to be very clear in your responses to HMRC from the first enquiry letter. Anything provided to HMRC needs to be consistent and thorough from the first communication and throughout – it will count against you if you contradict yourself later on.
If your business is innovating and genuinely carrying out R&D then this judgment shouldn’t put you off making a claim for tax relief. But we believe in the specialist nature of R&D work – in the methodology of a claim, the compliance to legislation, and the technical evidence needed. It is important that any claim is accurate, robust, and clearly evidenced.
For more information, or to find out what GovGrant can do for your business, please do get in touch.