Working out how much time my staff have spent on R&D
Share this article
Research & Development is a self-assessment tax relief for work carried out which fits criteria defined by HMRC. We overcome uncertainties which demonstrate our ability to overcome problems, which we hope will be rewarded by HMRC. But one uncertainty that’s still difficult to overcome is how to quantify our client’s costs.
The main costs associated with a claim are time and materials. But how do we calculate these? Over the years, this has become one of the most common questions I have been asked. I’m aware of algorithms that will calculate the cost for you. But in reality, they just cannot replace a conversation with your client to discuss their projects and get a real feel for their activity.
R&D exists when a project seeks an advancement in the field of science and technology and overcomes technical uncertainties which are not readily deducible or available in the public domain. So, to understand this, we need to understand the knowledge which is to hand. What do our “competent professionals” know? This is our benchmark. To just say that the team spent 3 months on the project—and therefore apportion 3 months staff to its time—isn’t necessarily the most accurate.
Even within a project, there will be peaks and troughs in advancement. Then there are direct and indirect activities. The rule of thumb is to start the clock ticking when we encounter a problem. But we rarely stop the clock until the project is complete. The truth is, we should. It is only legitimate to claim for time when we are actually advancing our knowledge.
Preferably, there should be accounting and record-keeping processes to enable the tracking of expenditure to the R&D activities on a ‘real time’ basis, so apportionment methodologies are only used in limited situations. But thankfully, HMRC recognises that this is not always practical for companies, especially smaller companies where R&D activities only make up a small portion of their activities. So, there’s no need to dig out time sheets and clock cards, but be prepared to be able to verify your data should HMRC ever open an enquiry.
We have a duty of care to our client to ensure we have discussed these issues with our client. Our recommendation is to discuss the projects your client has worked on. Point out what elements of the projects qualify for R&D. Find out what staff worked on the qualifying activities within the project and this will give you an accurate assessment of the staff costs to be associated with the claim.