Avoiding Common Pitfalls in Your R&D Tax Credit Claim
R&D tax credits are a fantastic way for innovative businesses to recoup costs and reinvest in future projects. However, with HMRC tightening compliance measures, it’s more important than ever to ensure your claim is accurate and fully aligned with the latest requirements.
While most companies claiming R&D tax relief do so in good faith, there are some common pitfalls that can lead to issues, ranging from delays to enquiries or, in some cases, rejected claims and potential penalties.
Here are some key areas where businesses often go wrong.
Claiming Routine Work as R&D
Not all development work qualifies for R&D tax credits. Just because a project is challenging or complex doesn’t necessarily mean it meets HMRC’s criteria.
To qualify, your project must:
Seek an advance in science or technology
Involve scientific or technological uncertainties that weren’t easily solvable
Go beyond routine product development, testing, or software update
Before making a claim, you need to consider whether a competent professional in your industry would have already known how to solve the challenge. An assessment needs to be made on whether the knowledge gap exists within your wider industry or simply just within your own company.
Overestimating or Inflating Costs
It’s essential to get your claim calculations right. Overstating or including non-qualifying expenses can cause problems.
Common mistakes include:
Claiming for staff who were not directly/indirectly involved in the R&D
Including 100% of an employee’s salary when only part of their time was spent on R&D
Adding costs for marketing, commercial activities or customer support which are not eligible
Understanding the boundaries of the R&D project within an overall development project is essential.
If HMRC spots inconsistencies or believes costs have been inflated, it could trigger further review.
It is best practise to keep clear records of how much time and resources were allocated to R&D activities. If an employee splits their time between R&D and other business functions, make sure this is reflected accurately in your claim.
Inconsistent Financial Data
Your R&D tax credit claim doesn’t exist in isolation; it needs to align with your company’s financial records. If HMRC spots discrepancies between your claim and your accounts, it could raise questions.
Common red flags include:
The payroll figures in your claim exceed the figure in your company’s accounts
Subcontractor costs in the claim differ from what’s recorded in financial statements
Always ensure your financial team and tax advisors are aligned on the figures used in your claim. A well-documented claim should tell a clear and consistent story.
Poorly Structured Narrative
Submitting a claim with a vague or poorly prepared narrative is one of the fastest ways to invite scrutiny from HMRC. Even if your R&D activities are clearly eligible for R&D tax credits, if they are not presented in the right way, it will provide an incorrect picture for the case worker at HMRC; leading them to think you do not qualify.
A strong claim should include a variety of information including:
A detailed description of the technological baseline that existed at the start of the project
Clear explanation of the scientific or technological advance sought, relative to the baseline
Outline of the uncertainties faced, why they were so difficult and how they were overcome
Remember, HMRC isn’t just looking for what you did. They want to understand why your project required R&D and why it was not achievable through the application of existing solutions.
Ignoring Pre-Notification Requirements
As a result of recent legislative changes to R&D tax relief, some businesses now need to pre-notify HMRC of their intent to claim. If this applies to you and you don’t notify HMRC within six months of the end of your financial year, you won’t be able to make a claim. It is advised to seek professional advice early to determine if this legislation affects your business.
R&D tax relief is a valuable incentive, but getting the details right is key to ensuring your claim is not selected for further checks. Avoiding these common mistakes will help towards preparing a robust R&D tax credit claim.
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