R&D Tax Credit Claims: 3 Key Tips For A Successful Claim

Originally set up to be a lucrative scheme to position UK companies at the forefront of innovation, Research & Development (R&D tax credit) for software is one of HMRC’s flagship policies and one of the most significant reliefs from tax that is available for companies.

However, since January 2023, there has been an increase in claim rejection and investigation to crack down on fraudulent claims, resulting in some genuine claims being caught in the crossfire.

Until December 2022, the number of enquiries into claims was very low (roughly 1 in 10,000); now it is closer to 1 in 500 claims within the software space. HMRC now deem the digital technology arena as ‘high risk’ which means that companies claiming tax credits within this space have a higher chance of receiving an enquiry.

As with most things in life, forewarned is forearmed. It’s important to understand not just the criteria, but how HMRC professionals interpret these, to submit claims which have the greatest chance of success.

R&D Tax credit- what qualifies?

Software is continually evolving, but for a claim to be approved, it needs to be proven that there is an advance in the overall knowledge of capability, not a company’s state of knowledge or capability alone. A criterion that is difficult to ascertain in such a fast-moving sector.

In the eyes of HMRC, R&D is defined when a professional in the field determines that there isn’t an existing readily deducible system and that the new system overcomes technical uncertainties. Simply applying software in a new way, melding software together or developing parts of software to speak to each other would not be classed as R&D.

A claim is often rejected when the developed software simply speeds up or simplifies a process. The software itself might be complex, but if it already exists in some form this is not considered as R&D for tax relief purposes. For example, it can take up to two years to install an ERP system, but the technology already exists; it is just being adapted to the business concerned.

Complexity vs uncertainty

HMRC define qualifying projects as ‘overcoming scientific or technological uncertainty’ and /or by their very nature not being readily deducible by a ‘professional in the field.’

They don’t go on to further differentiate between complexity and uncertainty, which makes it somewhat tricky for companies to understand the all-too-vital nuances here!

The biggest issue here is that HMRC are now being far stricter in their evaluation; the technical criteria haven’t changed but they are examining each claim far more thoroughly. They employ competent professionals to determine whether any other businesses are doing something similar, and therefore the claim will be rejected as it is defined as being readily deducible.

Determining deducibility in the field

When HMRC are checking the accuracy of a claim, they carry out open-source searches (i.e. using Google) to investigate if something similar is readily available. However, larger companies won’t share their R&D results so not everyone will have access to the findings.

Within a claim, companies need to clearly articulate the innovation deployed during R&D and offer clear evidence that they have moved technology forward. However, it can be confusing as to what is classified as ‘innovation’. For example, both Apple and Samsung would have a claim when conducting R&D for their version of the smart phone. Apple developed the iPhone but didn’t share how they did it; Samsung had to conduct their own R&D to develop their own smartphone.

3 KEY Tips for submitting successful R&D Tax Credit claims:

1. Ensure technical ability: Investigations are serious, so having someone with a strong taxation knowledge-base plus technical expertise will really increase your chances of approval. Once a claim has been rejected, HMRC will ask about the advisor’s skills and technical ability and consider this when making a final decision.
2. Establish a good working relationship from the off: Establishing a relationship with the client during the planning stages can really improve claim approval chances. Having real-time conversations rather than retrospectively can ensure the correct procedure is followed long before year-end.
3. Identify contract clarity: Identifying who the claim should be coming from is key in an R&D claim. Should it be the advisor, the client or a funder? The answer comes down to the wording of the contracts with all parties involved – an additional reason for establishing an ongoing relationship with the client.

Mark Graves is a Partner and member of the Innovation Tax team. Mark primarily works on the technical analysis of R&D claims, preparing technical reports to support the claims, identifying qualifying expenditure and liaising with his accounting and tax colleagues on the preparation of the associated tax computations and claims. He is experienced at handling HMRC investigations into R&D claims, although thankfully this takes a minimal amount of his time as he and his team prepare robust claims to minimise the risk of an investigation.

If you have any queries about R&D claims, or anything else we discussed in this article please do not hesitate to get in contact with Mark Graves, a member of our Innovation tax team., or your usual AAB contact.