In this article we explore various ways you can ensure that you’re getting the most value from your R&D Tax Credit claims. In our experience, many companies that are claiming R&D Tax Credits are either under-claiming or preparing claims that are non-compliant in some way (which in turn can lead to loss of value through triggering an HMRC enquiry). We will be exploring both scenarios, the downsides that come with each and ways to avoid them.
Ancillary Activities and Integration Uncertainties
Ancillary activities often get overlooked in R&D Tax Credits claims and are a common reason for companies not securing an optimal claim value. On its own, an ancillary activity does not meet the definition of ‘R&D for tax purposes’. However, if it directly contributes to a project that has an overarching technological uncertainty, then it can be perfectly valid to include it as eligible expenditure in an R&D claim.
For example, if a company pays someone to dig a hole in the ground, that clearly does not qualify for the scheme on its own. But if that hole is a necessary step in building a technically challenging structure that will resolve one or more technological uncertainties during its construction, then the costs of digging that hole can be included in the claim.
Similarly, if a software project involves various systems that don’t usually integrate with each other, this can cause what is known as system uncertainty. Projects that require the resolution of system uncertainty are potentially eligible, even if each element is well understood and doesn’t present a technological challenge on its own. This is often relevant to software development and system integration projects.
Following Best Practices for Data Collection
Innovative projects are often dynamic in nature with new requirements suddenly appearing and causing them deviate from their original plan. In such projects, team members can be brought in on an ad-hoc basis at different stages and then taken out just as quickly to return to more routine work.
This “organised chaos” can make it difficult for companies to keep track on how much expenditure they should include in their claims. This raises the risk of either claiming too little or not being able to justify your expenditure if the claim is ever challenged.
Arguably the most important thing you can do to improve your R&D claim data collection is to communicate the importance of tracking any “dark areas” in an R&D project where a team member makes a significant contribution to the project but without any form of a paper trail. This often happens with senior, salaried employees who are brought into an R&D project on an ad-hoc basis and contribute to the project on a strategic or other intangible way.
To read about more best practices for R&D claim data collection read our article here.
Salaried Employees vs. Subcontracted R&D
Using subcontractors or externally provided workers (EPWs) to carry out your R&D means that you will only be able to include a maximum of 65% of their fees as eligible expenditure in your claim.
If your company is highly-innovative and a significant part of the work you perform is valid R&D, you should weigh up the flexibility of using subcontractors against the significant claim increase that would come with hiring salaried employees to do the same job. This comparison can be calculated using previous years and projected ahead alongside other business projections.
The new PAYE cap that will affect some loss-making companies that subcontract their R&D is another reason to consider this question. This cap limits cash payments for loss-making companies to (3 x a company’s PAYE / NI contribution) + £20,000.
To find out whether this PAYE cap will affect you, visit our PAYE claim calculator.
HMRC Enquiries – The Great Value Killer
Nothing will bring down the value of both current and future claims like filing a non-compliant claim and triggering an HMRC enquiry. A claim’s value can be hugely affected by an enquiry in multiple ways:
- To manage an enquiry properly can take a huge amount of energy and resources away from the business.
- Your company may be flagged by HMRC as “high risk” and your future claims are likely to be scrutinised much more critically.
- Depending on the nature of the non-compliance HMRC may reduce the claim amount significantly, reject the claim outright or even open investigations into your previous claims. HMRC can even issue penalties of up to three times the claim amount.
- If the agent that you use to prepare claims has lots of clients under enquiry, then there is a high likelihood that something about their methodology has raised a red flag and your claims could be next.
If you do not have the considerable knowledge and experience needed to prepare an R&D claim that is fully compliant, do not take the chance as it is simply not worth the trouble. Consider getting the help of someone who does.
To read more about how to avoid an HMRC enquiry, read our article here.