In both startups and finance, preparation is often rewarded.
And, this may be especially true when it comes to the details of R&D tax relief claims.
So for the sake of risk management, let’s prepare. Let’s take a look at the red flags, the problems to be, and the elements that should not make it onto a claim.
In turn, knowing this will arm you with better knowledge when talking to a claim specialist, HMRC, and even with your own team.
Here are some things that should not be included in an R&D claim:
- 🚩 Overcoming difficulty, without uncertainty
- 🚩 Using existing technology without seeking a technological advancement in the face of uncertainty
- 🚩 If your competent professional isn't competent enough
- 🚩 Overcoming uncertainty…but in the wrong area
First…what DOES qualify as R&D?
To understand where there might be misunderstandings in the R&D claim process, let's first establish the basics. What does qualify as R&D?
Overall, you must meet these criteria:
- 👍 Your R&D project must seek to make an advance in science and technology
- 👍 Your project must have faced uncertain technological or scientific outcomes
- 👍 You must be able to prove why your project’s uncertainties could only be solved with R&D and not with publicly available information or preexisting knowledge.
The category's full definition is provided in the BEIS Guidelines on the Meaning of R&D for Tax Purposes, which expands on each element and where each qualification begins and ends.
For businesses that meet the above requirements, the R&D tax scheme can be a valuable asset. And if done through a company such as Claimer, submitting a robust claim can be a painless and reliable process.
With HMRC dramatically increasing scrutiny on filed claims in 2022, it’s more important than ever to ensure that the R&D specialist you work with critically appraises what you are claiming for, and whether it counts as qualifying R&D expenditure or not.
So what DOESN’T qualify as R&D?
While it’s still advisable to speak to an expert about specific details, below are some things to watch out for when considering making a claim.
1 🚩 Overcoming difficulty, without uncertainty
Proving that R&D work attempted to overcome uncertainty, not just difficulty, is a key part of the technical report. Indeed, this is something HMRC may choose to focus on.
According to HMRC, technological uncertainties likely exclude any uncertainty that "can be resolved through relatively brief discussions with peers", or problems that "have been overcome in previous projects on similar systems".
An example of uncertainty could be, for example, building a new data model with several interrelated components/modules for your database, seeking to overcome some of its existing technical limitations. Then, there is high uncertainty around whether the sought solution could be applied seamlessly or not.
Something seen as not working to overcome uncertainty, instead, could be integrating a python library to your platform, one with shoddy documentation, that's been around for some time, and has generated public projects with improvements. Though improving it from scratch may be difficult, the knowledge to do so is readily available, so it's not considered an uncertainty.
Overall, If the knowledge to solve your uncertainty was readily available, while it may be frustrating or time-consuming to implement, it may not qualify as R&D. As HMRC itself states, "not every problem is an uncertainty".
Further, it's important to distinguish costs not associated with overcoming uncertainty in your claim.
You may have a project that legitimately faced uncertainty…but, the important thing to remember is that you can only claim costs associated with this directly.
Let's look at another example. Within your company's broader initiative to, say, develop a novel machine learning tool, you also carried out related tasks, like setting up an account management system. While part of a larger project striving to overcome uncertainty, the smaller challenge instead dealt with readily available knowledge, and as such did not work to overcome uncertainty. This would not be seen as R&D.
Indeed, within a commercial project timeline, work that falls within the scope of market feasibility, patent work, design, industrial upscaling, or commercial application would not qualify for R&D relief. This, even while belonging to a larger timeline which included projects tackling scientific or technological uncertainty.
2 🚩 Using existing technology (without seeking technological advancement in the face of uncertainty)
Using or combining technology that's currently available, even for new and innovative functionality, does not necessarily qualify as R&D.
The bar you need to hit when utilising existing technology is seeking to achieve an appreciable improvement in the field of technology or science whilst faced with uncertain outcomes.
Let's first start with an 'appreciable improvement'.
This is something that changes or adapts something's scientific or technological characteristics "to the point where it is ‘better’ than the original", according to HMRC.
It also must be non-trivial, constitute more than a minor or routine upgrading, and not simply take "existing science or technology and deploying it in a new context".
So what’s an example of utilising existing technology that likely wouldn’t qualify?
In the field of software engineering, many people cite the creation or integration of an API as R&D. But without any further detail, HMRC will see this as a routine development.
This is because the creation of an API is common practice, and the whole point of APIs is for them to be integrated. So without specifying the actual advance, the outcome appears certain (it can be built and it will work). This will be seen as a routine improvement in the exchange of data between two parties, which has no significant uncertainty and is not an improvement in the field of science or technology.
With your project, ask how it was seeking an advancement, what uncertainties you faced, and in what field they would qualify.
3 🚩 Projects that are led by non-experts in the technical field
A ‘component professional working in the field’, in the eyes of HMRC, is the individual at your company who has sufficient technical training and experience in order to make a judgement call over determining what constitutes qualifying R&D activity and routine work both outside and within your R&D project(s).
Their technical competency must relate to the area of R&D activity. So, a software engineer is very unlikely to be considered a ‘component professional working in the field’ for a life sciences-related R&D claim.
This individual is included in your technical report. And, their legitimacy as a competent professional in the eyes of HMRC is an essential part of your claim.
The way HMRC sees it: if your competent professional does not have sufficient technical training or experience in the field of the R&D activity being conducted, how can they possibly make a judgement that it's actually qualifying R&D under the scheme guidelines?
It's worth noting that HMRC has a meaningful bar to hit that goes beyond a purely managerial or project-led capacity.
HMRC stipulate that to be seen as a competent professional, an individual must "have accumulated experience and be recognised as having a successful track record". And, "simply having worked in a field or having an intelligent interest in it does not, by itself, make a person a competent professional".
In other words, someone who is not an expert within the field who is overseeing the R&D project – however successfully – may not qualify as a competent professional to a HMRC agent.
Qualifying criteria could be, for example, if the person you are naming has a PhD in the exact area of R&D activity stipulated, 10+ years of practical experience, or both. Someone new to the field, a project manager, or a purely managerial person is not going to cut it.
This is evaluated on a case-by-case basis, by a HMRC agent. There is no strict definition, since, as per CIRD81300:
“The expression 'competent professional working in the field' has not been defined as the natural meaning is considered to be self-explanatory.”
4 🚩 Attempting to resolve uncertainty…but in the wrong area
There are many ways businesses and projects can overcome uncertainty. What R&D relief requires, though, is that this must be attempted exclusively in the field of tech and/or science.
That means that several items are off the table. For example, technological innovation could merely face business model or customer demand uncertainty. To qualify as R&D, the innovative activity must face scientific or technological uncertainty.
🧮 It's important to remember that HMRC's qualification of science and technology, as of time of publication, also excludes pure mathematics. This distinction might be relevant for projects that include machine learning or lending, for instance.
As with every distinction made so far, there is unfortunately no simple definition. Roughly, though, the important thing to remember is that what you claim must be categorised as science and technology.
This is what HMRC will be looking at. And, it's just one of the reasons why we recommend having trained tech specialists involved in your claim writing process. 🙋
Increased R&D claim scrutiny from HMRC
Striving for accuracy with HMRC is always recommended. But, why should you especially care now?
👀 You may have heard that there’s an increased rigour in enforcing what is – and what isn’t – R&D.
Indeed, in early 2022, HMRC doubled down on enforcing regulations for R&D claims. To counteract potentially fraudulent claims, HMRC hired new compliance officers and created their R&D tax relief Anti Abuse Unit. What’s more, a cut to the R&D tax credits available to SMEs and startups was recently announced in the 2022 Autumn Statement.
Overall, a badly written and prepared claim may be further delayed, trigger an enquiry, and, if found to be incorrect, rejected and penalised.
In this climate, preparation really is key. With a clear-eyed view of the situation and experts to help you out, you can minimise your risk of an enquiry and benefit from the R&D relief you are owed.
👋 If you’re interested in talking to an expert at Claimer about what you can claim, chat with us using the live chat (bottom right) or pop us an email. Or, if you’re ready, you could get started with your claim right away.
Want to follow developments as they happen? Drop your email below – we’ll be writing many more deep dives to get you and your company through this recession and through the R&D payout delays.