Q&A | Common mistakes and pitfalls in preparing R&D claims
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Thanks to everyone who joined us at our Common Mistakes and Pitfalls in Preparing R&D Claims webinar on Thursday 24th June. This session covered the six most common mistakes we see in R&D claim preparation and stimulated a large number of particularly tricky questions from our attendees. We couldn’t cover all of these in the session, so we’ve answered them all below.
If you have any feedback on our advice or how the webinar went get in touch – we’d love to hear from you!
Viewing link: https://www.youtube.com/watch?v=GrZ5OMRg38U
1) What is science or technology for the purposes of R&D tax relief?
According to CIRD81900, science is ‘the systematic study of the nature and behaviour of the physical and material universe’, and technology is ‘the application of scientific knowledge or principals, where ‘scientific’ is based on the previous definition’.
Roughly translated, this means if you can relate your client’s work back to a ‘core’ science such as biology, chemistry or physics, then it could be eligible. For example, engineering work can be seen as the practical application of maths and physics, or development of new coatings for undersea structures can be linked back to chemistry.
The guidelines also specifically state that work in the arts, humanities and social sciences are not science for the purpose of R&D tax relief.
2) If HMRC was to extend the definition of science to include some social sciences, what would their plan be in relation to historical claims that would now be seen as eligible?
At the recent meeting of the R&D Consultative Committee, there was some very high-level talk about possible extensions to the scheme, including allowing claims for work done in social science. Given the high-level nature of this talk, and the complete lack of further information from HMRC, it’s very difficult to say how this would be implemented, if and when HMRC decided to extend the scheme in this way.
3) If a company creates their own software to solve a problem even though that software is already commercially available, would that constitute R&D?
This is another ‘it depends’ kind of an answer! HMRC’s guidelines do allow for the duplication of existing technology – CIRD81900 paragraph 9d states that a project that ‘seeks to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way will… be R&D.’
What this means is that if a company creates their own software that duplicates something that is already commercially available, they might be able to claim R&D tax relief for this as long as they are required to make an advance in software science to achieve their aims.
4) If making a product a certain colour is technically difficult, for example needing to use a whole different material, and it is uncertain if this will work, could this be eligible?
Absolutely! The CIRD guidelines differentiate clearly between work to improve the cosmetic and aesthetic appeal of a product or process, which is not eligible, and work to create a desired cosmetic effect through the application of science to technology, which is eligible as long as the work requires an advance in science or technology to be made. In this example, trying to achieve the desired colour through buying off-the-shelf paints would not be eligible, but work done to develop a new type of paint that delivers the colour could be eligible.
5) I’ve been told that structural engineering companies can have eligibility R&D tax relief. Does this mean a construction company could claim R&D tax relief?
Definitely! In fact, we’ve written about this before. In more general terms, any type of company in any sector could be eligible to claim R&D tax relief, so long as their projects meet HMRC’s criteria for eligibility.
6) What would you suggest if you believe an R&D company is putting claims through that are not eligible due to inexperience?
This is a really difficult one, and we’re not sure whether there’s really a right answer. The main thing is that you should never submit a claim that you don’t believe is eligible, so if your inexperienced client prepares a claim that you aren’t happy with, we’d recommend pushing back. Beyond that, sadly, there’s not much you can do – there’s no easy way to highlight these claims to HMRC, or to report providers that you believe are preparing erroneous claims.
7) Are furlough payments considered to be a grant?
We’ve covered this in some depth here, but in short, no! HMRC’s advice is that, given that furloughed workers could not have been working on R&D projects during this period, all furlough payments should be excluded from an R&D tax relief claim, but these payments won’t have any other effect on the claim.
8) Are competent professionals only people who have a degree or career background in physics, biology, or chemistry, or do people such as engineers count?
To quote CIRD81300, ‘The expression ‘competent professional working in the field’ has not been defined as the natural meaning is considered to be self-explanatory.’ Not the most helpful start! However, this section does explain that a competent professional is expected to be knowledgeable about the scientific or technical principles involved, be aware of the current state of knowledge and have accumulated knowledge and a successful track record.
As you can see from this explanation, any career background or degree would qualify someone to be a competent professional, as long as they can tick these three boxes.
9) Can a limited liability partnership (LLP) make an R&D claim if one of the partners was a corporate client? Or is it purely companies that can make a claim?
LLPs cannot claim R&D tax relief. There’s no way around this, no matter the make-up of the LLP. CIRD81200 states that the claimant must be a company, and the definition of company used excludes partnerships.
10) What if the information of how to reach the industry baseline is not in the public domain?
Happily, this situation is allowed for in the guidance. As long as the details of how an advance was achieved are not readily available, for example if they are a trade secret, then working to achieve the advance again would still constitute eligible R&D.
11) Do grants and loans received during the year need to be added to the turnover figure? If so, would this push a company into being a large company?
According to the Companies Act 2006, turnover is ‘the amount derived from the provision of goods and services falling within the company’s ordinary activities’. The turnover limits for determining whether a company is a SME for R&D tax relief use the same definition, so there’s no need to add in grants and loans to this figure. This means there’s no way grants or loans could push a company into being a large company.
12) In your software under the heading ‘area of science’ you say that some areas of business do not qualify for R&D. One of these areas is ‘business & management’. What does this mean as we have a client we intend to submit a claim for that is probably in this area?
The key thing to realise here is that the areas of science listed in the App refer to the underlying science or technology being advanced, not the functional or commercial outcome. For example, if your client works in the area of management consultancy and embarks on a project to develop a related app, the advance would be in software development not management. This applies to any project – it’s vitally important that you go beyond the functional outcomes and look ‘under the hood’ at what area of science or technology is being advanced.
13) Is it acceptable for the treatment of intangible assets in the accounts to differ from the treatment in a claim? For example, some allowable R&D costs could be classed as an intangible asset on the Balance Sheet and not in the Profit and Loss as an expense.
Yes, definitely! Much as we’ll always say that you should strive to align your claim with the figures in the accounts for the period, there are a few circumstances where this just won’t be possible. Claims where allowable costs have been capitalised as intangible assets is one such circumstance. All we’d advise here is making sure that the figures still make sense – the costs in the claim, for example, can’t exceed the figures for the relevant intangible assets.
14) What is HMRC’s enquiry window for opening an enquiry into a claim?
HMRC’s time limits for opening enquiries into R&D tax claims are exactly the same as for any other aspect of a company’s tax return. This means that HMRC have 12 months from the date the return was filed to open an enquiry, unless the conditions for a Discovery Assessment are met. In these circumstances, the time limits HMRC have to open an enquiry are four, six or twenty years, depending on the reasons for the enquiry.