HMRC released some additional information for R&D compliance as part of its wider Guidelines for Compliance (GfC) program. This guidance seeks to provide HMRC’s views on several often-misunderstood tax issues, to clarify common issues, and to promote compliance.
For R&D tax relief, the guidance contains of a number of new interpretations and advice, as well as important reminders for companies and agents considering submitting a claim.
Expectations of claimants and competent professionals
Where HMRC has previously relied on the opinion of competent professionals to assert that an advance in science or technology had been made, it has now clarified that it would expect a competent professional to provide information about the project in more ‘R&D tax relief’ specific language. This includes:
- the actual uncertainties;
- the work that was carried out to resolve the uncertainties;
- how attempting to resolve each uncertainty was a project or subproject; and,
- the steps involved in overcoming the uncertainty within each project.
In contrast to this, the updated guidance for agents states that they should:
- identify the activities that directly contributed to resolving the uncertainty;
- identify qualifying indirect activities;
- identify qualifying costs; and,
- check if any costs are restricted or disallowed.
What this suggests is a greater emphasis on a company ‘owning’ their claim and understanding more of the tax aspects of it — as opposed to the common approach within the wider industry of claimants of simply describing the work to an advisor. There’s also further guidance on more specific requirements for a project’s competent professional, such as high-level qualifications in the field, a publication record, or industry awards.
Identifying qualifying R&D activities
Within HMRC’s new interpretation of qualifying projects, there’s a greater emphasis for advances to be pursued as part of a plan or method to resolve uncertainties. It shows us that that in some cases claims have been considered non-qualifying, even if an advance has been achieved without this.
This plan will need to be more sophisticated than a simple ‘continuous improvement’ project. It requires specific methodologies to resolve uncertainties and reminds us that any work carried out outside of the resolution of scientific or technological uncertainties will not qualify.
Additionally, there’s emphasis on an evidence-based approach to identifying and apportioning costs for qualifying activities — presumably as justification for any potential HMRC enquiries.
Submitting a claim and record-keeping
Record-keeping should be extended to direct project work, and HMRC recommends that any advances, uncertainties, and project methods are recorded and planned before the project.
When it comes to evidence, HMRC has provided more specific examples of the kind of documentation that can be used to substantiate a project:
- project charts;
- drawings;
- designs;
- test results;
- photos of prototypes;
- minutes of meetings;
- email exchanges; and,
- any other relevant records.
Summing up
HMRC’s position in this guidance is clear: claimants should have direct involvement in their claim. Also of key importance is the competent professional’s testimony in showing that a particular scientific or technological field has been advanced through a research and development project.
Author: Will Shiner, CT: Entrepreneurial Tax
