Approaching an R&D tax claim can be a daunting process. You only need to look at the amount of information to satisfy HMRC’s requirements before a sense of overwhelm creeps in. Much of this burden can be ignored if a diligent process is conducted throughout the year — one that tracks and maintains records. This makes for a much smoother process when it comes to preparing the claim — for both for the adviser and the company providing input.
Keep written records throughout the year
The starting point for any claim is the work undertaken during the year — to establish whether this is qualifying, and what areas of this should form the basis of the narrative information provided to HMRC. Keeping a written record of what is conducted during specific months or quarters is extremely useful in several ways.
Written records are sometimes required by grant providers, so this may be something you already do. But it also helps in other areas. Firstly, when it comes to explaining your work to your adviser, it’s much easier to facilitate this with concrete records rather than trying to remember a whole year’s worth of work from the top of your head.
It’s also useful to keep this information as backup, in case HMRC asks about either the qualifying status of the work being conducted, or the time being claimed for it. This is particularly prevalent now, with HMRC continuing to contest increasing numbers of claims. Having an abundance of technical information on hand to show to HMRC the size of the uncertainty being faced is a welcome addition for any enquiry!
Track staff time
Leading on from keeping narrative records, it’s also helpful to keep records regarding staff time. For the majority of claims, staff time will be the greatest contributor — so it’s key to make sure that all qualifying staff time is being captured.
Many companies will keep staff timesheets to track project work, which can be really helpful to ascertain what the qualifying percentage for their contribution during the year should be. Strict timesheets aren’t a requirement — it can be as simple as keeping a monthly tracker of where staff spent their time monthly. With the need to time apportion claims post April 2023 coupled with further scrutiny from HMRC on all aspects of a claim, this is increasingly important.
Track financial elements
It’s also good practice to track other areas of spend by splitting these into different codes in your accounting software (Xero, FreeAgent etc). Each of these systems allows the user to split a material code. For example, all R&D related materials can be tracked via a specific code, rather than the main material code.
Not only that, but this approach can also be applied to all financial aspects of a claim, including software, subcontractors, or externally provided workers. It serves two purposes: it allows you to track your R&D spending accurately and enables your advisers to maximise the potential of your claim through appropriate expense claims.
Tracking expenses like this will become essential as we move to a merged scheme that has a carve out for R&D intensive companies (40% of total expenditure from April 23 & 30% from April 24). An early understanding of the level of expenditure will most certainly help with forecasting and cash flow projecting a likely credit.
The timeline – line up your ducks
A company must go through multiple stages of the year end process before an R&D claim can be made. It is, in fact, possible to begin preparing the claim as soon as the year ends — and its best practice to do this. But the claim itself cannot be finalised until signed accounts are received and the company’s corporation tax return is prepared. The R&D claim is a part of the tax return and cannot be submitted without this.
As such, it’s best to make sure your ducks are in a row post year end. This will ensure the process can flow as smoothly as possible and prevent anything holding up the claim being submitted. From submission, the average wait time to receive the tax credit is between 6 to 8 weeks.
The sooner we can get the funds the company deserves into their pocket, the sooner you can continue with the unbelievable developments we’re lucky to see in this role!
Author: Jak Henderson, CT: Entrepreneurial Tax
