After a few turbulent years of a changing R&D scheme along with a high-volume compliance approach being taken by HMRC, the R&D tax credits landscape feels like it is settling down again.
The changes made and lessons learned from enquiry activity have created an updated set of hurdles for companies to consider before making a claim.
Claim Notification: What period of time are we looking at?
HMRC’s Claim Notification rules came in for accounting periods beginning on or after 1 April 2023 and have been tripping up potential claimants ever since. The Claim Notification Form (CNF) and which accounting period(s) a company can claim for is the first aspect to think about when looking at a potential claim.
The CNF is particularly relevant for first-time claimants or companies that have not claimed for a while, and needs to be filed within 6 months of the end of the accounting period in question. If that deadline has already passed without a CNF being filed, then the company cannot claim for that period.
Companies who have filed a valid claim in the previous three years can be exempt from the CNF requirement, but things can get complicated around what counts as a “valid” claim. Please see our CNF article for details but if in doubt, filing a CNF on a protective basis is usually the way to go.
Competent Professional: What is a competent professional and does the company have one?
Every R&D claim needs input from someone who understands the science or technology behind the project. HMRC’s first question on the Additional Information Form (a form that must accompany every claim) is “What is the field of science or technology”, and it is key that a competent professional in that field can be relied upon during the claim-building process.
A competent professional is someone suitably qualified or experienced in the field and HMRC give the following examples of “good evidence” that someone can be considered a competent professional:
- high level qualifications in the field, alongside continuous professional development
- a significant number of years’ experience working at a high level in the field
- a good scientific publication record in the field
- industry awards
- other public recognition for contributions to the field
Baseline: Do we have a genuine advance against the field as a whole?
For a project to qualify for R&D, it must seek an advance in science or technology against an existing baseline. A common issue is a company looking at the baseline in knowledge and capability for themselves internally, rather than comparing against a baseline for the wider industry.
A strong claim should outline the position and give specific examples where possible. What existing knowledge or capability was already out there, and why could a competent professional not readily work out the answer?
Technological Uncertainty: Is complexity enough?
HMRC are clear that a project being complex alone does not mean that sufficient technological uncertainty was encountered to make it qualifying.
Many projects are difficult, expensive or commercially risky, but that does not automatically make them qualifying R&D. For genuine technological uncertainty, it needs to be unclear how to achieve the desired outcome using available knowledge or standard approaches.
Claimants again will need to lean on the opinion of their competent professional and ask the question of whether each uncertainty was readily deducible or whether there was genuine technological uncertainty.
Costs: Have we incurred enough to make a claim worthwhile?
Even where a project meets the technical criteria, the claim still needs to be commercially worthwhile to go ahead with.
We need to identify which costs are directly connected to qualifying R&D activity and think about bringing in apportionments where needed. The cost of preparing the claim also needs to be considered, particularly the time required from competent professionals within the business to provide the technical detail required for the Additional Information Form.
Tripping points we see often are where overseas expenditure makes up a large bulk of the claim (often no longer qualifying under the merged scheme) and R&D-heavy directors who are paid mainly through dividends which do not count as qualifying R&D expenditure.
Joe Lock is Assistant Corporate Tax Manager – call 01242 776000 or email joe.lock@randall-payne.co.uk to arrange to discuss how these hurdles relate to your business.
HMRC R&D Claim Notification: Requirements, Deadlines and Exemptions