When R&D tax claims go wrong

Guest blog from Jumpstart

Why do some claims go straight through while others are difficult to resolve with HMRC?

To the casual bystander, it may seem somewhat baffling why some R&D claims seem to zip through HMRC with minimal queries, while others get bogged down in the type of enquiry that makes you wish you’d never heard of the scheme in the first place!

Part of the problem is that there is no defined format or set of documents that constitute “a claim” (in fact, in its simplest form, a claim is simply a number or two in a tax return). However, and this is especially true for larger claims, HMRC encourage companies to submit supporting documentation that is ‘appropriate’ to the size and complexity of the claim. This ambiguity over exactly what is required, combined with the several hundred pages of generic guidance and rules of HMRC’s Corporate Intangibles Research & Development manual, means that there is plenty of scope for confusion, or well-intentioned error, on the part of applicants.

Three of the most common errors we see when being asked to assist in companies’ enquiry defences are described below.

1. The claim focuses on the commercial case rather than technological.

The applicant gives a commercial description of its work that, while allowing it to showcase the potential or success of its project, does nothing to convince HMRC that the company understands the basis on which R&D tax relief is given. (At the risk of grossly over-simplifying, relief is given for resolving technical challenges with no obvious or easily-reached solution. Commercial considerations are nearly always irrelevant.) This fundamental error gives HMRC no assurance that the taxpayer understands what R&D is for the purposes of tax relief or where the boundaries of R&D lie. As such, the company can expect protracted discussions centred around its understanding of the scheme. Only once it’s shown an acceptable level of understanding of the guidance is HMRC likely to agree on the quantum of eligible costs.

2. Boundaries of R&D

Even when companies exhibit reasonable understanding of the scheme and its terminology, claims can be challenged if HMRC feels that the boundaries of R&D have been set incorrectly. Even in cases where the concept of the advance is understood and agreed, HMRC will often dig into when specific activities took place and whether those activities were directly or indirectly involved in resolving the technical challenges mentioned above. While some routine activities can legitimately be required for or linked to the core R&D, HMRC’s inspectors will generally seek to exclude costs related to pre- and post-R&D phases of the project, such as market research, intellectual property protection and initial sales and marketing efforts. Being very clear about when R&D is considered to have started and ended can help to minimise discussions with HMRC on this point.

3. Subcontracting

A common (and sometimes subtle) area of difficulty for applicants relates to subcontracting, and the relationships, contracts and expectations that exist between companies involved in the work. One dangerous preconception that some companies have is “We paid for this whole development, therefore it’s our R&D.” The truth can be more complex. Some companies do indeed commission a piece of work (say within software development), but do not themselves have the ‘competent professionals’ who would be able to recognise when R&D (as defined by HMRC) starts and ends – or even if it exists at all. Without competent professionals directing the work – and in particular the resolution of technical challenges that may arise in the project – it can be hard to argue this as R&D. More likely, HMRC would argue that the company was simply setting a specification for another company to implement, as opposed to defining a piece of subcontracted R&D. These types of discussions can get very nuanced and it’s hard to give definitive guidance beyond what’s in HMRC’s manual – much depends on the nature of the underlying facts and representing those in the correct way to HMRC.

Speak to Jumpstart

The upshot is that while claims can be disarmingly simple to submit, they can be bafflingly complex to submit successfully if you fall into the trap of making one or more of the mistakes mentioned here. (And as HMRC continues to improve its policing the scheme, mistakes will be caught more often and with greater financial consequences for applicants). With this in mind, it can pay dividends to take advice from a reputable technical and legislative specialist before preparing and submitting your claim.

‘Prevention is better than cure!’, and engaging the right company early on will almost certainly minimise the risk and time involved in your claim.

Jumpstart are the UK’s leading R&D tax relief specialist. Our technology-based approach to claim preparation is undertaken by PhD qualified Analysts with extensive industry experience in their own specific fields of science or technology. Our Technical Analysts are not only industry sector experts, but equally knowledgeable when it comes to HMRC’s legislation, ensuring maximised, accurate and robust claims.

In a climate where the value of claims being disputed by HMRC has grown by almost 400% over a twelve-month period, the fact that we offer free enquiry defence as standard on every claim we prepare and submit gives our clients a cast-iron security.

To arrange a free consultation to discuss your own R&D tax relief specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the Jumpstart team on 0131 240 2900 or [email protected].