What questions should you expect when HMRC checks your R&D tax credit claim?
Indicative evidence seems to suggest that HMRC does not conduct a high percentage of checks. But if they do decide to check your R&D tax credit claim, it will go much more smoothly if you carried out a thorough claims process prior to submitting your R&D claim – this will reduce potential time and stress in answering questions. Conversely if you cannot easily evidence your R&D claim then a check can turn into a stressful process which may result in claw backs and fines.
In this blog I look at the types of questions that HMRC typically asks. Question can be divided into three types:
- What were your R&D activities, when were they undertaken and what makes them qualify?
- How were your R&D costs compiled and what evidence do you have to support the costs?
- How was the R&D claim calculated?
From my experience HMRC officers do not always ask the same set of questions. Sometimes they may be more concerned about whether your projects and activities really qualify. In other cases, they want more evidence on how the costs are made up. Below I look at each of the three areas in more detail. My aim it to give you an idea of questions that could be asked. It is not an exhaustive list, but it should give you a guide on what is expected in terms of record keeping.
What were your R&D activities, when were they undertaken and what makes them qualify?
- What were the project timelines?
- What were the scientific or technological advances sought by the project/s? What were the scientific or technological uncertainties? When were these uncertainties resolved?
- Claimable expenditure is limited to the activity of resolving scientific or technological uncertainty. Were only these expenditures claimed?
- Who in your company was involved in deciding what your claimable R&D activities were?
- Regarding subcontracted R&D – provide a copy for the contract and say what the respective R&D role/s were.
- For each member of staff – provide information on their role/s on the R&D project/s.
How were your R&D costs compiled and what evidence do you have to support the costs?
- Provide a detailed breakdown for xxx cost type/s (i.e., the cost of: Staff, Externally Provided Workers, Subcontractors, Consumables).
- Provide a list of the R&D payments to subcontractors, along with evidence of when each cost was accrued and paid (i.e., copies of invoices and bank statements) and any restrictions applied, prior to applying the R&D enhancement.
- For staff costs – provide each employee name, job title and the percentage of time on R&D.
- For consumable costs – provide a detailed cost analysis with enough information to show what the items were and when the expense was accrued.
How was the R&D claim calculated?
- Provide an analysis of the £xxxx figure claimed as tax credit/tax relief, along with the steps taken to calculate the claim. Your breakdown should categorise cost per allowable legislated headings contained in CTA 2009, ss1123-1142.
The answers to these questions require an understanding of the Legislation, Guidelines, and the view HMRC take on these. In that respect if proper considerations of these factors have not been made HMRC checks can be difficult. Further, without this critical context, questions from HMRC may be answered incorrectly. This is “blood in the water” in terms of credibility. Doubt leads to further HMRC questions and checks.
As part of our service, we work through the R&D “rules” with our clients to collaboratively reach the correct conclusion about a claim. We then document those conclusions and work on correctly gathering the qualifying expenditure. This evidence of qualification and thorough process is submitted with the claim. This document covers most conceivable questions. HMRC checks are rare and dealt with as part of our service with no additional fee to our clients.
For non-clients we provide a successful HMRC Enquiry/Check advisory service for an agreed fee depending on the work involved. This process starts with a free document review of the communications with HMRC.
Please get in touch today to see how we can help your R&D claim.