Introduction
With the recent First Tier Tribunals (FTT) for Research and Development (R&D) claims the landscape is ever-changing and with the growing enquiries from HMRC there has been a lot to learn about how HMRC are viewing the legislation and the recent changes.
We at CT: have noticed an increase in non-clients approaching us for support on their enquiries that were originally submitted by other tax advisors. This has been interesting to work on and we have shared our learnings here. It is important to note that most of what HMRC are querying is usually what would be provided in the report and additional information form, however, they are asking for further detail for their own understanding. In most scenarios this information is being handled by a non-expert in the relevant field so clearly presenting information in a layman friendly format is the best approach to resolve queries raised.
Projects
Overall
HMRC’s main focus regarding the projects seems to be demonstrating clearly how the field of science or technology as a whole has been advanced. If this is something that can be googled and appears to be ‘straight-forward’ or ‘easy’ it is quickly being discarded as not being qualifying for R&D. It is important to make it clear and concise to HMRC why this is not routine, whether they think it is or not.
Timescales of work undertaken in each project have also been very important in enquiries, for example, having to provide a breakdown of work undertaken for each phase of the project, along with who is working on that phase and what their role within it is. It is not a legislative requirement to keep these records, it is therefore very challenging to remember a year or two previously on what happened during every R&D project in set months. Therefore, it would be advised to keep records that function for your company on different phases of the project, this can easily feed into the information you provide your R&D Tax Adviser for when the projects need to be written up for the claim. Within enquiry responses, HMRC have specifically asked that if R&D is still underway, that the response should cover the timeline up until the current position of the project. Specifically, asking for how and when uncertainties were identified, this allows the company to show the parameters of when R&D was identified by the company. As well as how the uncertainties are overcome within all stages, from planning to development, noted within.
Advance
Alongside this, we have noticed that HMRC have been more focused on the advance for the field provided for each project. They look to gain specific definitions regarding the project of what the specific scientific/technological advance is. Within the projects, enquiries have seen a focus on providing the gap in technological knowledge or capability which necessitated the commencement of R&D being undertaken. It is important to be clear what the gap within the field in question is, resulting in the advance being sought during the development of the project.
Importantly, the advancement cannot be restricted to just the company in questions knowledge, rather this must be advancing the overall capability and knowledge for the field as a whole. It is important to note that in scenarios where information from other companies in the field is maintained as a trade secret then the company replicating this capability would still form an advance in the overall knowledge of the field and could be classed as eligible.
Competent professionals
On the back of this, HMRC have noted within their enquiries that the projects need to provide an advancement or appreciable improvement to what is already available within the field and the competent professional needs to explain why information available in the public domain is not suitable. This has been a point of focus in recent First Tier Tribunals cases (Get OnBord Ltd and Tills Plus Ltd), where HMRC have focused on competent professionals and their knowledge and expertise, to determine if their work is advancing the industry and meeting the requirements for R&D. Within the response, HMRC have been seen to ask specifically for an explanation, “in a form understandable to the non-expert”:
e.g., The current technological limitations, within the Company and therefore the overall industry that the Company resides in.
Our blog on “The Get Onbord” case can be found here
The competent professional has also been known to be asked to explain the technological or scientific baseline against which any advance is measured.
Additionally, an explanation of the research undertaken, whilst providing the methods undertaken to establish that the issues at hand were uncertainties in the overall field. Within this point provided by HMRC, it is important to note that the uncertainty could not be solved by a competent professional. It is crucial that the competent professionals understand the guidance behind the information being asked for and what is needed to be presented. By understanding the guidance provided, the competent professional is required to explain the uncertainties during the period. After noting the uncertainties, the competent professional should be able to explain how the work undertaken during the period compares with the typical approach in the industry in identifying the advance in science or technology.
Technological and scientific uncertainties
Within some of the enquiries that we at CT: have seen, there are points focusing on the scientific or technological uncertainties within the project. Specifically, providing an explanation of the research undertaken to establish the uncertainties in question within the overall field of science or technology. Noting, the same as the advance that the uncertainty cannot be solved by using readily deducible methods within the Company’s knowledge or information in the public domain. The competent professional within the company needs to be able to understand the guidance to explain the uncertainty in relation to the industry standard, if the competent professional cannot explain this to the full extent, HMRC views the claim as not having the backing to provide a real advancement within the relevant field.
Concentrating directly on the uncertainties, HMRC have focused on how the company in question decide to overcome the uncertainty. This information may be asked to the competent professional in question, where in Tills Plus Ltd v HMRC this became an issue. This was due to the fact that the individual in this case claimed to be a ‘businessman’ rather than an expert in the field of IT or artificial intelligence, all the information provided to overcome the uncertainty was not seen as an advancement as there were severe discrepancies between the information provided due to the competent professional.
Our blog on the “Tills Plus Ltd vs HMRC” case can be found here
Financials
Records and back up are the go-to for evidence required when it comes to the financial element of R&D claims. These are the easiest questions to answer within an HMRC enquiry as invoices and payment details are easy to find and demonstrate that you are cooperating with HMRC to close the enquiry as soon as possible. The main advice we would press here is to have clear records of your R&D spend, separate ledgers for your subcontractors, externally provided workers, R&D consumables, software costs and clinical trials, if applicable. Clear organisation for any relevant contracts for your projects, with subcontractors or clients, this will make yours and HMRC’s process quicker and hopefully easier. The opposite of this was within the FTT Hadee Engineering Ltd v HMRC where the Company in question incorrectly, overstated the salary costs associated with R&D activities whilst also claiming for bonuses that were associated with a previous period. The Company were also denied 6 of their 7 projects within this claim due to a lack of evidence with material costs as these were not described in full within the claim.
Our blog on the “Hadee Engineering Co Ltd v HMRC” case can be found here
HMRC look to gather all the available information when it comes to expenditure on consumables and software. Specifically, the invoices and receipts as the payment must be made prior to the payment of the tax credit being released by HMRC. Confirmation and evidence for the items purchased, to show that the materials for instance were actually paid for by the company and therefore received it. Along with a clear representation of how much of each consumable or software item was used directly or indirectly for the R&D. After the use of the item, we have also seen HMRC ask for how the software/consumables were used or disposed of after being used in the R&D process. Therefore, a timeline appears to be required per item from purchase to end result.
Eligible costs
Within an enquiry, HMRC have been known to question the evidence behind certain costs. Requiring a description of work undertaken, the name and job title of each individual in the claim and the activities that were undertaken, alongside a description of their actual roles. The description of the roles in question relate to the percentages provided, which according to HMRC need to be ‘just and reasonable’ relating to the work being undertaken and the role of the staff member undertaking the job. Noting this point, when HMRC enquire on costs relating to R&D activities, there have been occasions where the percentage of time per staff member, per project has been requested.
EPWs & subcontractors
Specifically, there has to be invoices showing the amount paid to externally provided workers or subcontractors, evidence of payments made and there can also be a question of providing any contracts related to the R&D claim. This would need to be shown in every claim, no matter if claiming under RDEC or SME to show that the costs have been paid for. Again, the company will need to explain how the percentages are a ‘just and reasonable’ apportionment along with descriptions of the work undertaken for the projects to back the percentages up.
Consumables
At CT: we have also seen specific enquiry questions relative to costs regarding the total amount paid across the board with materials, software and water fuel and power. The way that the qualifying amounts have been determined need to be easily explained to HMRC, whether using specific invoice amounts or the ‘just and reasonable’ apportionment.
Travel
There are also circumstances that we have encountered that a company would involve travel costs within their expenditure, HMRC are known to ask for a full breakdown of the costs provided within travelling for the purpose of R&D. Examining specifically how this directly links to the R&D, the costs in question, the places staff travelled to, which should be in line with the spend itself alongside the number of miles recorded.
Here at CT: we are open to helping companies out with our clients through the enquiry process. If you would like to get in touch regarding an enquiry, email us at: rdtax@ct.me
