What Happens If You Don’t Keep Records of Your R&D Activities?
Launched in the year 2000, R&D (Research and Development) Tax Credits essentially offer a tax break for businesses engaged in innovation and was set up by the UK Government.
A lifeline for businesses both big and small, they allow a limited company to claim back up to 33% of its expenditure in research and development, regardless of whether the project was a success or not.
For SMEs, it doesn’t matter which sector or industry your company is in, or even if it makes a profit or a loss – it can still claw back up to 33% of the amount it has spent. With larger companies, a maximum of 10% of R&D expenditure can be claimed back, which can add up to some serious numbers. Below Cale Bannister at Myriad Associates explains the ins and outs of record-keeping, shining some light on the subject for those who may be a bit confused about it.
The way it works is that the amount is paid either as a refund on a company’s Corporation Tax, or in the case of loss-making businesses, as a lump sum credit. The money can then be used for anything, from taking on new staff, settling bills for contractors or even paying salaries.
So why does good record keeping matter?
The key to a successful R&D Tax Credit claim is not simply in telling HMRC that your R&D project took place, but in proving it. The onus is on your company to persuade the tax authority that your R&D activities set out to solve a specific scientific or technical problem (whether it actually succeeded in solving it or not is actually irrelevant) – and the only way to do this is through data and records.
Record-keeping is a vital part of the R&D Tax Credit application process, and HMRC expects to see hard evidence in the form of high quality record-keeping. Accurate, detailed records will not only speed up the process of claiming but can even help to maximise the overall value awarded.
No relevant records at all of your R&D activities? You’re not alone
And most importantly, all is not lost! The first thing to do is not panic; there’s still a good chance you can complete an R&D Tax Credits claim. It’s often the case that companies don’t realise at the time that R&D activities are happening that they are eligible for a tax reduction. Only after the work is complete do they hear about R&D Tax Credits and then end up kicking themselves! Don’t worry – we’ve seen it before. The good news is that innovative projects tend to leave their mark on your business in one way or another, for example in planning applications, media releases or new buildings being erected. So even without any formal records, in many cases developments can still be pieced together to create the basis of a company’s R&D Tax Credit claim accurately enough.
What R&D projects are you looking to capture?
To make an application for R&D Tax Credits, you must expressly outline exactly what R&D activities took place and what you believe your qualifying costs to be, as defined by the Department for Business, Energy and Industrial Strategy. The main cost categories are company employees, subcontracted R&D, consumables and external workers such as agency temps.
It is a legal requirement that you attribute these costs to your eligible R&D. When you read through the guidelines you’ll see phrases like ‘just and reasonable apportionment’ and ‘appropriate proportion’ which simply mean you need to work out the attributable time and expenses that were solely committed to R&D activities. If you’re still unclear, we’ll be happy to help you with this.
What level and type of R&D record-keeping does HMRC expect?
The government’s Corporate Intangibles Research and Development (CIRD) manual produced by HMRC offers full guidance on how claims for R&D Tax Credits are reviewed. It’s worth nothing here that actually no specific requirements to keep records for R&D purposes have been included. Having said this, over recent years there has been an apparent shift in HMRC’s stance regarding more formal record-keeping expectations, and it’s within its rights of course to update its requirements at any time. Increasingly, HMRC is expecting to see up-to-date, relevant documentary evidence which can be submitted to support an R&D Tax Credit claim. Indeed, as such tax reliefs are courtesy of the public purse (and as we all know, public money is not exactly free-flowing these days), it’s not exactly unreasonable for HMRC to require good quality record-keeping. However, in practice there is a little flexibility with regard to companies that are submitting a claim for the very first time.
So what’s the tricky bit?
The main thing to watch out for when preparing a claim is with regard to the time that has passed since the R&D activity took place. As companies are allowed to claim for the two preceding accounting periods, they may inadvertently be looking at projects that occurred before this time (after all, the years go by so fast!). Be careful, as it’s easy to miss the deadline for a claim and therefore not be able to fully maximise its value.
Be careful, as it’s easy to miss the deadline for a claim and therefore not be able to fully maximise its value.
How up-to-date do company records need to be?
When it comes to capturing R&D projects, nothing really beats record-keeping in real-time. From HMRC’s perspective it puts your company in a better light as it appears to be a more diligent way of working with less room for errors. This again can often increase the value of a company’s claim compared to claims that rely on estimates.
How records are put together largely depends on the company and its needs. A timesheet system seems to currently be HMRC’s preferred method however this may not always be possible. An alternative way would be to submit a quarterly review of R&D activities undertaken, complete with additional explanation regarding the nature of the work.