At MSC R&D we often get asked to look at the previous R&D Tax Credit claims of new clients.
And it is quite concerning how poor some of the previous submissions have been.
Now in the past, when the chances of a HMRC enquiry were about a likely as a lottery win, this may not have concerned any of the relevant parties. However, in light of the recent, well documented, increase in HMRC focus and resource on tightening up on non-compliant claims, ensuring your future claims score at least an ‘A’ in future will be essential.
Below is a genuine example of a poorly constructed claim which we reviewed recently, worth over £500,000. Not untypical!
Accounts
- The accounts were abbreviated and didn’t contain a detailed profit and loss account, preventing HMRC from checking the claimed expenditure against the accounts to see if it is compatible. This will increase the HMRC perception of a risk of an incorrect R&D Tax Credit claim.
- The accounts make no reference to the presence of R&D nor to the accounting treatment of R&D expenditure. Such material is often supportive in persuading HMRC of the validity of the R&D identification and costing.
Tax computations
- No information was given as to the make-up of the R&D expenditure. The entire claim was made under the SME regime, so no consideration has apparently been given to potential restrictions required for R&D activities that have been subcontracted to the company by customers
R&D description
As support for an R&D claim It was not adequate in numerous respects. For example:
- It was essentially a commercial description of the company activity, and did not seem to have been tailored to address R&D questions
- It does not distinguish between commercial and technology innovation
- It showed no evidence of a knowledge of, or reference to, the Guidelines defining R&D for R&D Tax Credit purposes
- It showed no knowledge of, or a reference to the legislation defining eligible R&D except in applying a 130% mark up
- It did not identify a field of technology
- It did not identify R&D projects, and their technological advances or uncertainties
- It did not benchmark advances against the public domain technology knowledge at the time
- It did not describe work of particular years
- There is no indication that R&D has been assessed by a competent professional in the field
Expenditure listings
- Essentially these were a selection of items from a ledger account, largely consisting of identified subcontractor costs. They may well have been R&D, but there was not enough information to assess that.
- It is not clear whether the claim preparer had understood the distinction between the different expenditure categories of subcontracting and externally provided
Conclusion
Clearly this claim lies at the extreme in terms of ‘laziness’ and disregard for the R&D Tax Credits scheme- but sadly it is not uncommon, even for such large claim values.
This has to and will change – otherwise the R&D Tax Credit scheme will fall into disrepute and many genuine claimants may be affected by the inevitable backlash.
At MSC R&D, we are active in lobbying on behalf of the industry to improve the scope and integrity of the scheme – optimisation and compliance is our mission.
We are specialists in software claims.
