R&D for tax purposes - What counts and what doesn't?

HMRC has been busy recently. They've been actively briefing MPs on their approach to R&D compliance. The focus has very much been on the topic of when it comes to tax …

What is R&D and what isn't it?

Understanding what qualifies as R&D is the first step to claiming tax relief. According to HMRC, R&D must aim to achieve an advance in science or technology. It goes beyond routine activities like data collection or testing. It involves seeking solutions to unknowns in your field.

For your project to qualify, you'll need to show that you're tackling a scientific or technical uncertainty. Simply put, you should be working on something that hasn't been done before in a commercial setting.

What is HMRC looking for?

When it comes to R&D tax relief, HMRC has clear criteria for determining which projects qualify and what costs are eligible for relief. Their focus is on ensuring that businesses are genuinely engaged in innovation and not just inflating claims.

To do this, they scrutinise three main areas - risk assessment, quality control, and fraud prevention.

Risk assessment

HMRC uses a risk-based approach when selecting businesses for compliance checks. If your company has a history of non-compliance or makes frequent or particularly complex R&D claims, HMRC will consider your claim a higher risk.

This could result in more intense scrutiny. For example, if your past submissions have been inaccurate or unclear, you're more likely to be flagged for a detailed review.

Additionally, businesses that claim R&D tax relief across multiple areas or industries - particularly those claiming large sums - may also trigger a compliance check. Being flagged doesn't necessarily mean there's an issue. This means you should ensure your claim is watertight and has accurate documentation and solid supporting evidence.

Quality control

For HMRC, the quality of your R&D claim is paramount. To qualify for relief, you must demonstrate that your project meets their definition of R&D - an advance in science or technology that goes beyond routine problem-solving. This means you need to clearly outline the technical uncertainties faced, the advancements sought, and how your work breaks new ground.

HMRC also looks closely at the costs you're claiming. Not all expenses related to your R&D project will be eligible. You can typically claim costs like staff wages, materials, and software, but each must directly relate to the R&D activities. For example, if you're working on a new software platform, costs for developers involved in the research phase are eligible, but expenses for marketing staff would not be.

Your claim should be precise and well-supported with relevant technical documentation, time records, and evidence of expenditure. Poorly explained or inflated claims will likely be challenged.

Fraud prevention

Fraudulent claims are a significant concern for HMRC. They've stepped up efforts to detect and prevent abuse of the R&D tax relief scheme. While most businesses are honest in their claims, a minority have sought to exploit the system by making false or inflated claims. HMRC's focus on fraud prevention aims to safeguard the integrity of the relief and ensure that it continues to support genuine innovation.

It's definitely not a good idea to try and cheat the system. The consequences can be severe. Penalties for false claims range from financial fines to criminal prosecution. Businesses found guilty may also be barred from future claims, causing long-term damage to their ability to benefit from R&D relief. To avoid any suggestion of fraud, make sure you fully understand HMRC's guidelines and are honest in what you claim.

By ensuring your R&D claim is accurate, well-documented, and transparent, you reduce the likelihood of triggering any of these concerns, making the process much smoother.

Record keeping is key

To back up your R&D claim, you need solid evidence. This includes keeping clear, detailed records of your projects and costs. HMRC may request things like

-        Project plans

-        Technical reports

-        Timesheets

If HMRC selects you for a compliance check, being able to quickly provide this information will make the process smoother. Good record-keeping isn't just about compliance; it also helps you identify all the costs you can claim, ensuring you're getting the full benefit.

Stay compliant and benefit from R&D relief

With HMRC's increased focus on R&D tax relief compliance, it's more important than ever to ensure your business is adhering to the rules. At Liondaris & Co., we help businesses like yours stay on top of their R&D claims, from understanding eligibility to keeping the correct records.

Need help with your R&D tax relief claim?

Contact Liondaris & Co. today to make sure you're maximising your claim and staying compliant.