In the past accountants might have been comfortable dealing with the financial aspects of an R&D tax relief claim, but may have felt less qualified to assess the technical or scientific aspects of their clients’ claims.
Many accountants I have spoken to recently have left this aspect entirely to their clients, believing them to be the experts in their field. But now that HMRC’s rate of enquiry is increasing they find that the client can’t answer HMRC’s technical questions, and neither can they.
What is baseline in an R&D tax relief claim?
In order to show that R&D has occurred a company needs to demonstrate a scientific or technological advance to HMRC. Importantly this is an advance in the overall knowledge or capability in a field of science or technology, not just an advance in that company’s own knowledge or capability. A baseline defines what knowledge, state of art, and known solutions were publicly known at the start of any R&D project.
How to evidence a baseline and what are HMRC looking for?
First and foremost what HMRC don’t need is a sales pitch, buzzwords, or a good PR story. The language should reflect the scientific and technological subject matter. It can sometimes be easier to write a narrative that tells the client’s story, but if this doesn’t help HMRC answer their questions it is surplus to requirements.
How can patents be useful in establishing a baseline for HMRC?
It can be a challenge to evidence a baseline but demonstrating what patents existed at the start of the project can be a really useful reference point. Speaking to our IP Manager, Alec Griffiths, he confirms how useful patent information can be. Even more so now that HMRC are using IP and patent knowledge as part of the R&D tax relief claim process.
Alec comments “Many businesses assume they know what everyone else knows, just because they have been in the industry for a long time. But often products and technologies never make it to market, so effectively remain “hidden”. Competitors may have already carried out the R&D, even if they don’t currently sell the resulting innovative product or service.
One way to be absolutely certain is to analyse the patent landscape. GovGrant can provide a snapshot of the patent situation for a specific technology that answers the baseline question for HMRC.”
Looking at patents can also help form the technical description to answer HMRC’s questions – knowing what other companies have done, not done and how that has been described can be useful to create the justification for your client’s R&D. Patents inherently carry information on the challenge that was being overcome and the pathways that were followed to achieve results.
Why a Google search may not be enough
HMRC do ask about a Google search, to see what is already out there. It’s a good start but it might not be enough to be exhaustive proof of what is already known in the industry.
Although patents are regarded as publicly available, they do represent a bigger challenge to navigate. Even if you’ve identified the relevant patents they can require an element of interpretation to understand how they are relevant (or not) to the R&D baseline for your client.
As Alec says “A patent search may sound like a lot of work and expensive compared to the value of the claim but we can provide something quite focussed specifically for the baseline. Of course, there are other commercial and strategic benefits to this intelligence that clients might find useful. It’s a useful asset and once a client has that information they are better equipped for R&D projects and claims in the future.”
Using patents to establish the R&D baseline – a client example
Take, for example, a company who makes chocolate truffles. They have a challenge that they want to extend the shelf life of their truffles but also want to maintain the mouthfeel and texture of their chocolate. A search demonstrates that there is a patent for the process to stabilise the chocolate for a greater shelf life, however, because it involves freezing it alters the texture of the product. So our company can use that patent, and build on that technical narrative, to demonstrate that there is an issue in the industry and that they have come up with a new solution that wasn’t previously available to the industry.