There has been a lot of angst in our industry about the rate at which HMRC has been opening enquiries.
For Source Advisors’ clients who face an HMRC enquiry we have the confidence to stand by our claims with a proven claim methodology and a rigorous quality assurance process.
But what is the outcome? Is it possible to defend an HMRC enquiry and retain the full amount of R&D tax relief? Here we look at just a few scenarios where we have engaged with HMRC and defended R&D tax relief claims on behalf of our clients.
1. Make sure that HMRC have all the evidence available
With the limited information required in the Additional Information Form, we continue to assemble a comprehensive technical report with supporting financial workings. We encountered a enquiry where it was evident that HMRC had not reviewed this wider information. With one swift reply we re-presented our reports and received confirmation from HMRC that the enquiry would be closed off. This does raise the question as to how, or why, the technical and financial reports were overlooked initially. Likely a simple oversight but certainly proves the point, it is always best to reaffirm that HMRC are starting from the same position and that they have reviewed the detailed reports presented with the Company Tax Return (CT600) submission. It may be enough to evidence your claim immediately.
2. It is possible to prove R&D is taking place, even in unlikely industries
We are aware that certain sectors have a reputation for making erroneous, or fraudulent, claims. They include widely publicised cases where creating a new flavour of milkshake or burger topping are being held up as an advance in the overall knowledge or capability in a field of science or technology.
However, if you are a genuinely innovative food production company there is an opportunity to evidence your R&D during a enquiry. Our client manufactures chocolate truffles and they identified the challenge of extending shelf life whilst also maintaining the mouthfeel and texture of their chocolate.
Our client took existing methods of extending shelf life and, with the support of clearly articulated technical response, were able to demonstrate that they have come up with a new and improved solution that was not previously available to the wider industry. By showing the scientific trials, the chemistry involved and the temperature calculations, we were able to evidence the R&D. Their R&D claim was upheld in full and the HMRC enquiry was closed.
3. It is possible to make and defend R&D claims in software
Defining R&D in software development is one of the most challenging areas for advisors and HMRC alike. In such a global, fast paced sector it can be a challenge to establish the baseline in technology.. Without a well defined baseline, proving the advance can be more complex. The routine adaptation of an existing product or process will not meet the required tax definition of an advance in science or technology for HMRC.
However, there are opportunities to demonstrate that integrating platforms can qualify as R&D, that the new platform is greater than the sum of the parts. It may take some time to talk HMRC through this, to provide additional supporting information, but it is possible to come to an agreement that a software claim meets the tax definition for R&D.
4. Having a patent on a product shouldn’t automatically preclude further R&D
Sometimes the fact that a business has part of their product or process patented can exclude them from making an R&D claim – if the innovation is known and publicly available through a patent how can it involve uncertainty?
Our client had developed and patented coffee equipment. They continued their R&D journey, developing new and innovative features and functionality that could be evidenced as R&D. Being clear of the baseline (represented by the patent) and showing the gap in overall knowledge that the new innovation filled, successfully showed HMRC the evidence to uphold the R&D claim.
5. Can I avoid an HMRC enquiry by including everything in the technical and financial reports?
A well articulated technical narrative and supporting financial workings are essential, but overwhelming an R&D claim with invoices, contracts, payroll reports, is not necessary. HMRC do not require this level of information nor would they want it at this stage. As your specialist, we will want to have sight of this information, to know that it is recorded and available. In fact it is our rigour in scrutinising this information that we can be confident that we have optimised your R&D claim, that we have neither over, nor under claimed for your qualifying R&D. If your R&D claim is selected for enquiry then HMRC will request this additional information to support the claim.
It is important to engage early and fully with HMRC and to have the support of an R&D specialist like Source Advisors to help you retain the tax relief for your innovation.
To find out more about the support we can provide here at Source Advisors, please get in touch.
