Risk

The company making the R&D tax relief claim is ultimately responsible for ensuring that it is complete and correct, even where an accountant or specialist adviser prepares the claim on its behalf.

HMRC can amend or reject an incorrect claim and, depending on the circumstances, interest and penalties may also arise. Using an adviser does not transfer the company's responsibility to that adviser.

This makes it important that directors understand what is being claimed, are comfortable with the methodology used and ensure that appropriate evidence supports the claim. A good adviser should explain any areas of uncertainty or judgement rather than simply asking the company to approve a final figure.

There is no single feature that automatically makes a claim high-risk. However, HMRC scrutiny is more likely to cause problems where eligibility is unclear, the technical justification is weak, qualifying expenditure is poorly evidenced or the claim takes an overly broad interpretation of the rules.

Potential warning signs include claiming routine commercial development as R&D, difficulty identifying the scientific or technological advance and uncertainty, unusually high qualifying expenditure, weak supporting records, questionable subcontracting treatment or a technical narrative that does not reflect what actually happened.

Risk should therefore be considered throughout the preparation of the claim, rather than only after HMRC raises questions.

There is no single prescribed set of records that proves an R&D project qualifies. The strongest evidence is generally the contemporaneous information created while the work was actually taking place.

Depending on the project, this might include project plans, technical specifications, design documents, test results, prototypes, trial records, development logs, meeting notes, emails, version histories, timesheets and records of failed approaches. Financial records should also demonstrate how qualifying expenditure has been identified and calculated.

The evidence should help establish what advance was sought, what scientific or technological uncertainties existed, how competent professionals attempted to resolve them and which activities and costs related to that work.

A strong technical report should explain why the projects included in the claim meet the definition of R&D for tax purposes. It should be written so that someone reviewing the claim can understand the technological or scientific challenge without needing detailed prior knowledge of the business.

For each representative project, it should clearly describe the relevant field of science or technology, the existing knowledge or capability, the advance being sought, the scientific or technological uncertainties encountered and the work undertaken to resolve them. It should also explain the role of competent professionals and distinguish qualifying R&D from routine development or commercial activity.

The report should be specific to what actually happened. Generic descriptions, excessive technical jargon or narratives that simply describe the commercial project without explaining the underlying R&D can weaken rather than strengthen a claim.