One of the most challenging areas of preparing an R&D claim is identifying and apportioning the qualifying staff time spent on either direct or indirect activities. 

The guidance suggests that there isn't a need to keep extremely detailed records such as timesheets, especially given that the legislation and guidance highlight the need for just and reasonable approaches and estimates. But recent experiences with HMRC suggest that there is a renewed need for hard evidence to convince caseworkers who may find estimates excessive. 

Given this, it makes finding a method of tracking the costs related to the claim vital to a well evidenced and compliant claim.

So, what is qualifying time for R&D purposes and what methods could we use to track it given the initial fear of having to maintain timesheets?

The lifecycle of a business

The need for record-keeping in support of an R&D claim can flex depending on the business.

Record-keeping for many companies that are claiming R&D tax credits is an onerous task, and where R&D is the sole function of a company it can be even less of a priority. In the early years of work, when the livelihood and even future existence of the company can be dependent on achieving scientific or technological breakthroughs, it's natural to spend more time on R&D and less time on areas like time tracking. HMRC understands this.

But as time progresses and companies grow, HMRC expects tracking to grow too - to be better and more sophisticated. This is understandable seeing as the claims themselves will become more complex. For example, years of successive growth and expansion of the team might mean that individual time is increasingly challenging to track, but HMRC would expect that more rigid evidencing methods are used to justify apportionments. This may not be formal minute-by-minute timesheets, but actually having a reliable method of tracking qualifying time or expenditure is a non-negotiable at this point. 

Project lifespan and activities

You should also consider the nature of the activities the thing you're working on demands. Over time, as the product/service develops and the qualifying nature of the R&D begins to naturally trail off as commercialisation takes place, the waters begin to turn murky as routine commercialisation work may be confused for R&D activities.

At this stage it's vital to understand the lifecycle of a project. If the end stages are commercially heavy with limited scientific or technological advancement, then it's likely that the R&D aspect of the projects time is up. The early market research stages of a project are also ineligible. 

Direct and indirect time

There are two measurements of what HMRC determine to be qualifying aspects of staff time. These are direct qualifying activities and indirect qualifying activities. 

Direct qualifying refers to activities that directly contribute to resolving the scientific or technological uncertainty - effectively the time spent getting your hands dirty on the work. This is work such as:

  • Experimental or investigative work
  • Design and development of prototypes
  • Technical analysis and problem resolution
  • Direct technical engagement and leadership

Indirect qualifying activities are certain supporting work that are needed for an R&D project to function. HMRC recognises that not all of R&D is under-the-bonnet, hard research work and that certain supporting activities are necessary. But these kinds of tasks are only deemed as qualifying indirect activities if they are undertaken specifically for the R&D project. They might include:

  • Scientific and technical information services
  • Indirect supporting activities such as maintenance or clerical duties
  • Ancillary support
  • Feasibility studies

Initially it may seem fairly obvious when an individual is directly involved in a project but actually creating a fair apportionment of their time, and to factor what aspects of that meet the criteria is where the complication comes.

An example

Let's say that an engineering company has a qualifying project lasting a twelve-month period. One of the employees is a CAD specialist and spends every Monday each week of the year working on design specifications for the project. A fair apportionment would likely be 20%, which seems simple enough so far.  

Now consider that on each Tuesday the CAD specialist spends their time providing technical insight to other areas of the project with the goal of resolving technological uncertainty with the project leads. This time is typically seen to be more indirect in nature, as it doesn't directly involve a hands-on aspects of the project. It's time that could easily be missed from a claim. Accounting for the indirect activity might increase the apportionment of time - perhaps a fair estimate might be that the CAD engineer spent 25%-30% of their time on the project rather than the initial 20% estimate.

But that's assuming that all of the engineer's work each Monday was related to the project. Let's now say that perhaps half of those Mondays were spent on more routine activities, trivial to overcoming the uncertainty and achieving the advance. In that case the estimate based on the engineer's timesheet would have to be scaled back from the initial 20% estimate, showing how easily this can turn from a simple exercise into a real headache. Now imagine having ten different staff, each doing different roles across different teams, and working out their qualifying time retrospectively and you can see why the headache risks becoming a bit of a consistent migraine.

Record-keeping and evidence

Thankfully HMRC understands that time-tracking and evidencing, particularly in early-stage companies, is sometimes more wishful thinking than reality, and part 5 of the Guidelines for Compliance clarifies what level of evidence is required to justify a claim. But it isn't set in stone - HMRC provides recommendations, not rules.

So what can you do?

Firstly, remember the core key concepts of any successful R&D claim:

  • a scientific or technological advance
  • previous uncertainty
  • clear project boundaries and goals
  • the identification of direct or indirect activities which resolve the uncertainty and achieve the advance

These are points that will always form the crux of a compliant R&D claim (as long as HMRC keeps its promise to leave the schemes alone for now). Have them in mind when estimating time.

Secondly, the best time to start was yesterday. Putting systems in ahead of starting work would be perfect. 

Where that isn't possible, using planning systems, other tracking systems such as Jira or monthly or quarterly stand-ups with those involved in the R&D to understand their workloads and efforts will produce useful records to support your claim. The most important thing is to ensure you have a method to keep a track of time that works for you. This helps to at least get rid of a portion of that headache when it comes to trying to work out reliable apportionments for any claim.

Finally, one of the most important conversations you can have - and one that should happen early on in the preparation process - is with your team conducting the R&D that you'll claim for. If your competent professionals understand what part of their work qualifies and what doesn't, that will clear a lot of your headache and share the burden. 

What does this mean for you?

Along with the need for the notification requirement, early support and advice is becoming critical to making sure that a company can jump the range of early hurdles now set in front of them.

This is a conversation that is becoming increasingly common and we'd be happy to discuss how you can ensure that claims remain compliant. Reach us via rdtax@ct.me.