Note: All articles in this blog are intended to provide general guidance only. Please contact us for specific guidance for your particular circumstances.
R&D Tax relief is a very valuable benefit to companies undertaking R&D, often saving between 25% and 34% of R&D costs and providing welcome cash flow into the business at critical times.
However, frequently overlooked is the need to ensure adequate record keeping to evidence your company’s R&D expenditure and costs. Generally this is simple if done week-by-week throughout the year, but almost impossible if done retrospectively. Any company expecting to make regular R&D tax relief claims must put into place systems and processes to provide evidence to support the claims.
Identification of R&D expenditure is different from typical accounting processes in one crucial respect – judgement is needed to determine which parts of R&D expenditure are ‘qualifying R&D’ under the R&D tax relief schemes’ rules.
There are two types of cost allowable under the R&D schemes, those derived from employment costs (which may be calculated using existing payroll, pensions data and recorded time / effort data) and those derived from purchase invoices / purchase receipts.
Therefore, at the very least, if you do nothing else to keep records of your R&D activities and expenditure, do the following:
1. Record the names of projects you suspect might contain R&D as you go along
2. Implement project orientated time (effort) recording for all Directors, employees and agency staff involved in any projects that might contain R&D activity
3. Identify, perhaps by (ledger) coding potential R&D invoices (or photocopying and putting in a pile), all expenditure items that might contain R&D expenditure. In some cases it might be simpler and more effective just to identify the suppliers that typically invoice for R&D activities, so that all their invoices can be evaluated when preparing the claim.
The result will be that identifying R&D expenditure at the end of the financial year becomes a simple process of evaluating what proportions of known R&D project costs are ‘qualifying R&D’ suitable for inclusion in the R&D tax relief claim… Much simpler than trying to remember what happened 15 months ago!
Nick Cook, Principal Consultant.