Checklists for R&D Success
Checklist 2 - Are you compiling your claims correctly?
We have put together this checklist because we know that some companies are opening themselves up to HMRC challenge by not keeping or submitting sufficient records on how their Research & Development (R&D) claims were worked out.
The tendency is to think that HMRC has checked and approved a claim just because they have settled it, when this is not the case. In 95% of cases HMRC processes R&D claims without checking them at all. But they may follow up and make a check at any time, so you could be making claims for many years without a single HMRC check and then suddenly HMRC takes an interest. When they do take an interest, if they find your records or claim information wanting, you could be in serious trouble.
If HMRC suspects that errors have crept in innocently, they have a good reason to open an enquiry and can go back over four years. If they think you have been careless with your claims or worse still inflated them – i.e. they become aware of issues – they can go back six years. In both cases if your claims are reduced you will have to pay any underpaid tax or overpaid tax credits with interest and probably penalties as well. On top of that an HMRC enquiry will be time consuming and is often very stressful as well as costly.
The checklist: You should be able answer YES to all relevant questions
If you can answer YES to the questions in this checklist, HMRC should have what they require and you should be in a good position to deal with any HMRC queries or enquiries.
Information provided to HMRC
If you can answer YES to these questions, HMRC has the information they say they want to receive.
1. Have you provided a list of costs per claim period including total R&D costs for:
- Internal staff salaries being claimed as R&D costs?
- Reimbursed staff travel & subsistence on R&D projects?
- Externally provided workers/agency staff (connected company)?
- Externally provided workers/agency staff (unconnected company)?
- Subcontractor costs (connected company)?
- Subcontractor costs (unconnected company/body)?
- Relevant portion of software licences for software used for R&D?
- Consumables including materials and energy used in undertaking R&D?
- Payments to subjects of Clinical Trials?
2. Have you provided a technical description for a sample of projects? (It is an HMRC requirement that technical descriptions be provided - see project by project information below).
- Best practice is to provide a technical description for up to 10 individual projects.
- Each description should include the project start and end date and R&D cost claimed.
Compiling R&D claims and record keeping
If you can answer YES to these questions your record keeping is in good shape!
1. For your R&D projects - do you have on record:
- A list of all R&D projects/activities being claimed including project start and end dates?
- A breakdown of the R&D costs claimed per project (or per a sample of projects)?
2. Can you provide a technical description of your main/largest R&D projects including:
- What advance in science or technology was being sought?
- Why this was considered to be an advance?
- What scientific or technological uncertainties were faced during the project?
- What work was carried out in order to resolve the scientific/technological uncertainties?
- The names, job titles, relevant experience/qualifications/knowledge of key project staff?
3. For internal staff doing R&D:
- Have you assessed the percentage of time spent on R&D per person per claim period?
- Have you multiplied each person's total salary cost (using actual payroll records) by their percentage of time on R&D activities to arrive at your R&D staffing costs?
- Have you kept a record of the above calculations?
- Have you included only 'reimbursed staff travel & subsistence expenses' for R&D projects only where the member of staff paid these costs from their own resources?
4. For Externally Provided Workers (EPWs) doing R&D (i.e. staff paid by an agency):
- Have you assessed the percentage of any EPWs time on R&D per person per claim?
- Have you used that percentage to calculate each EPWs R&D costs?
- If the staff provider is a third party organisation with no connection to your company - have you included only 65% of the total qualifying EPWs costs in your claim?
- Have you made sure that no directors of your company are being claimed as EPW's?
5. For all staff doing R&D
- Have you kept a note of how you arrived at any estimated staff time allocations?
- Have you kept a summary of the R&D role or activities undertaken by each person?
6. For Subcontractors doing R&D (only applicable to Small and Medium Enterprises*)
- Do you have written contracts with your subcontractors (or failing that written quotes) covering the R&D activities being claimed?
- Have you kept a list of invoices for the subcontractor costs included in your claims?
- Have you excluded subcontractor costs that are not eligible R&D costs e.g. transport or delivery costs, and made sure that work descriptions on invoices are relevant to R&D?
- If the subcontractor is a third party (i.e. an unconnected person or organisation) - have you included only 65% of the total qualifying subcontractor R&D costs in your claim?
7. For materials and energy consumed and software licences:
- Have you only included the costs of materials that were used up in doing the R&D?
- Where you estimated the portion of costs for consumed materials, energy or software licences - have you kept a record of your reasoning to arrive at your estimates?
8. Some costs that are not eligible - have you excluded from your claim all costs for:
- Broadband, hosting and servers?
- Rent, leases and business rates?
- Directors' dividends?
- Transport, carriage and delivery charges?
- Purchasing equipment, fixtures and fittings (only items that were destroyed as part of the R&D process can be included)?
- Materials used in goods sold?
- If you are claiming under the Small and Medium Enterprise scheme, all grant funded or subsidised costs?
- Staff travel & subsistence relating to R&D projects where the company directly paid for these?
- All VAT?
(*Note large companies with over 500 employees cannot claim for R&D subcontractors with a few exceptions - check HMRC guidance.)
Are you ready to find out if you qualify or how much your R&D claims could be worth?