Many businesses that have not made an R&D tax claim before may be uncertain of what documentation is required to claim R&D tax credits.
Grantica’s claims team is well-practised at helping companies answer this question, and we are familiar with the difficulties companies can encounter when they lack documented invoices for materials and other consumables used during an R&D project.
What documentation does an R&D tax claim need?
To support an R&D tax claim, you must provide the following documentation:
- Technical documentation: This should include a detailed explanation of the R&D project, including the objectives, technical challenges, and the steps taken to overcome them. This could include project plans, design documentation, test results, and technical reports.
- Financial documentation: You need to provide evidence of the costs incurred during the R&D project, including employee costs, subcontractor costs, materials costs, and other relevant expenses. This could include invoices, timesheets, and receipts.
- Corporate tax documentation: You should provide information on the company’s corporate tax position, including tax returns, accounts, and tax computations.
- Accounting documentation: You need to provide detailed accounting information to support the claim, including general ledger accounts, trial balances, and profit and loss statements.
- Payroll documentation: You should provide payroll records for all employees involved in the R&D project, including timesheets, salary and bonus details, and PAYE and NI contributions.
- Statutory accounts: You should provide the latest set of statutory accounts for the company, including balance sheet, profit and loss account, and any related notes.
- Subcontractor agreements: If you have used any subcontractors during the R&D project, you need to provide copies of their contracts and evidence of the payments made to them.
- Patent documentation: If you have filed any patents as a result of the R&D project, you need to provide copies of the patent applications and any granted patents.
- Technical review report: You should provide a technical review report summarizing the R&D project, including the technical advancements achieved, the technical challenges faced, and how they were overcome.
- Any other relevant documentation: You should provide any other relevant documentation you believe will support your R&D tax credit claim, such as research papers, conference papers, or any other relevant documentation related to the R&D project.
How important is documentation in an R&D tax credits claim?
According to HMRC’s guidance on R&D tax relief for SMEs, businesses must provide “evidence of the R&D project, what uncertainties you faced, how you tried to overcome them and what advances you made.” This evidence can include technical reports, project plans, design documents, test results, and other documentation that shows how the R&D project was carried out.
In addition, HMRC requires that businesses keep records of their R&D costs, including salaries, subcontractor costs, consumables, and other relevant expenses. These records should be kept for at least six years after the end of the accounting period to which they relate.
How far back can you claim R&D tax credits?
If your company has been pursuing eligible research and development (R&D) activities but hasn’t yet claimed R&D tax relief, you still have an opportunity to do so. You can file a claim for a tax return period that has already been submitted to HMRC within two years after the end of the accounting period.
These rules apply because R&D tax credits fall under Corporation Tax relief. Typically, you can modify your Corporation Tax return up to 24 months after the end of the accounting period.
Because many companies will claim R&D tax relief retrospectively, it is key to make sure your R&D project team is documenting your research and development activities at every step and that documentation is securely stored in a location that will be accessible for up to 24 months. In recent years, some companies have suffered the consequences of storing documents ad-hoc in locations such as WhatsApp chats, where data expires after a certain period has passed.
Note: The documentation of R&D activities is set to become even more important in the near future, as the rules relating to R&D tax credits claims change for accounting periods beginning on or after 1 April 2023.
What if I don’t have documented expenses for my R&D tax claim?
Understandably, some companies will not have access to past documentation if claiming retrospectively for R&D projects undertaken in previous tax years, perhaps even before the company was aware that the project may be eligible for R&D tax credits. In this case, you’ll need to be able to provide reasonable and realistic estimates of your expenses.
When clients lack relevant documentation for a claim, our team usually makes conservative estimates based on the percentage of salaried time each employee involved spent on a project. We will use this as a basis to calculate consumables used based on the rate of use, the number required, etc. We will only make an estimate where we feel confident that the data we do have access to justifies the calculation, and we always estimate conservatively.
It’s important to note, though, that without proper documentation, it can be difficult to prove to HMRC that your business has carried out eligible R&D activities and incurred qualifying expenses. Estimating your expenses for your R&D claim could result in your company receiving less relief than it is rightfully owed, or – in the worst case – leave you without the evidence to defend your claim in an HMRC enquiry or compliance check.
Impact of April 1st changes to R&D tax credits
As of April 1st, 2023, the rules surrounding R&D tax claims are changing. This will impact how far back you can claim R&D tax credits. Companies that haven’t claimed R&D tax relief in any of the preceding three calendar years will now be required to inform HMRC of their intent to file a claim within six months from the end of the accounting period to which the claim relates.
Consequently, new claimants to the R&D scheme will have a six-month window to notify HMRC of their intention to make a claim, as opposed to the current two-year window.
With the new requirement to notify HMRC ahead of conducting R&D, HMRC is signalling its expectation that R&D projects are well-planned and budgeted for before they begin. In short: if you’re a new claimant, then presenting a list of expenses which have been estimated retrospectively, without documentation, could reflect poorly on your claim.
Keeping track of your R&D expenses and documentation
To keep track of their R&D activities and associated documentation throughout the year, Grantica’s claims team recommends:
- Using a dedicated system: Use a dedicated system for documenting and tracking all R&D activities and expenses. This can help ensure that all relevant information is organised and easily accessible when it comes time to make a claim.
- Assigning responsibility: Designate a specific team member or department to be responsible for documenting and tracking R&D activities and expenses. This can help ensure that all relevant information is captured and that nothing falls through the cracks.
- Tracking expenses regularly: Keep track of all R&D-related expenses, including salaries, subcontractor costs, consumable expenses, and other relevant expenses. Be sure to record expenses as they are incurred, and to categorize them correctly to ensure that they are eligible for R&D tax credits.
- Reviewing and updating your records regularly: Regularly review and update your documentation and expense tracking system to ensure that it remains accurate and up-to-date. This can help ensure that you are maximizing your R&D tax credit claims and that you are prepared for any potential HMRC enquiries.
Launching this year: A dedicated system for R&D project documentation
In collaboration with MVP Solutions, Grantica is developing a tailored portal that allows for detailed tracking and management of the entire R&D claims process, from information gathering to claim preparation and submission. Using this portal, businesses will be able to easily keep track of all R&D expenses and project documentation, keeping their records up to date year-round.
The portal, scheduled for release in Q3/Q4 of this year, will offer a range of features designed to streamline the R&D claims process. Using the portal, Grantica’s clients will be able to record R&D data in our systems all year long, with document hosting capabilities, revenue management, and the ability to generate claim breakdowns, claim summaries, and more.
The portal is expected to provide a considerably smoother process for agencies and businesses alike to not only prepare and submit R&D claims but also support any HMRC enquiries or compliance checks using the portal’s ‘Enquiry Defence’ section.
When you use the Grantica Research & Development FrameworkTM (GRDF) in combination with our claims management portal, you can be sure you’re submitting an HMRC-compliant claim and maximise your claim potential – all with the support of our dedicated team of engineering and tax experts.