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27/03/24

Making a Claim for R&D Tax Relief

Making a Claim for R&D Tax Relief
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In an earlier article, we delved into the Research & Development (R&D) Tax Relief scheme, explaining its evolution, available schemes, and qualification criteria for tax credits.

This article aims to explain the factors considered by HMRC when processing a claim and details how KANGS can assist in any HMRC investigation arising from the application process or the use of such tax credits.

Several factors will be considered by HMRC when determining whether to accept an R&D application. Applicants should be aware of these factors to ensure the greatest possibility of success.

Optimising Your HMRC R&D Claim

The types of considerations made by the HMRC include:

1. Risk Assessment

HMRC will always conduct a risk assessment for each claim made in an R&D tax relief application, evaluating various risk factors. The risk factors considered include, but are not limited to:

  • Any errors made in mathematic calculations.
  • No analysis provided by the applicant of how the relief was arrived at.
  • The nature of the trade of the applicant.
  • The solvency/insolvency of a company (particularly relevant where payable tax credit is being paid).
  • The amount of R&D Disclosure.

2. Examination of Expense records

Expense documents relate to all qualifying expenditure, particularly any reference to the qualifying expenditure contained in the list above.
Below is a list of examples of the types of areas expense documents that should assist with any HMRC Investigation:

Independent research

  • Copies of any agreements or contracts relating to the contribution.
  • Evidence the contributions were paid, such as bank records.

Software

  • Receipts or contracts for software purchased, licensed, or commissioned.
  • Any evidence - e.g. internal cost accounting codes - showing it was properly charged to the R&D activity.

Staffing costs

  • PAYE records.
  • Contracts of employment for R&D staff.

Subcontract costs

  • Invoices from subcontractors.
  • Evidence of payments - e.g. bank records.

Externally provided workers

  • Documentary evidence of the contract or arrangement with the staff provider.
  • Copy of invoices received.

3. Examination of Non-Expense Records

While financial records may support any application, they do not, for instance, disclose the portion of an employee's time dedicated specifically to R&D, nor do they confirm whether any relevant R&D was taking place.

HMRC will therefore consider it necessary to consider underlying evidence/records held by companies. There is no exact record keeping requirement in respect of underlying records that HMRC require. The only condition for companies to maintain is to keep ‘sufficient records’.

As a result, records kept by individual companies will vary dependant on several factors, and HMRC should be flexible when determining which records will be of assistance. Examples can be provided to demonstrate the types of documents HMRC may wish to review during the processing of a companies claim for an R&D Tax relief:

  • Documents covering the aim of the R&D project i.e., what is being sought with reference to state of knowledge and or technology to indicate what hurdles need to be overcome.
  • Considerations of the commercial benefit of R&D for a company.
  • A project structure.

These records are relevant to any size company in their applications for R&D Tax relief, however further guidance in respect of SMEs who HMRC argue may not be able to provide all the contemporaneous documentation listed above, states that HMRC officers should also be willing to consider other documentation that a SME may hold.

How can we support you?

The R&D tax relief scheme is not only extremely complicated but a constantly developing area of tax law. It remains under constant scrutiny given its susceptibility to deliberate tax avoidance, with HMRC potentially undertaking investigations that may result in:

  • reduction in the amount of any relief claimed,
  • penalties imposed resulting from careless, negligent, or deliberately misleading applications,
  • criminal proceedings.

The experts at KANGS are here to offer comprehensive guidance in relation to HMRC investigations arising from the R&D tax relief scheme. We are delighted to answer any questions you may have. If you ever find yourself under scrutiny by HMRC, it is crucial to seek immediate expert advice and support.

Should you require our assistance, please contact using the details below.
Tel:       0333 370 4333
Email: info@kangssolicitors.co.uk

We provide an initial no obligation consultation from our offices in London, Birmingham, and Manchester. Alternatively, we provide initial consultations by telephone or video.

Hamraj Kang

Hamraj Kang
Senior Partner

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Tim Thompson

Tim Thompson
Partner

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Nazaqat Maqsoom

Naz Maqsoom
Associate

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