Key points in HMRC’s guidance

On 31 October 2023, HMRC released detailed guidance on how companies can check whether their work qualifies as R&D for tax purposes and the type of supporting documentation it expects to see as part of the claims preparation process. The guidance is aimed at clarifying the R&D definition, by providing examples, to assist companies in making correct claims and avoiding common mistakes.

The guidance addresses the following key points:

HMRC’s expectations from claimants

HMRC has set out a list of 14 steps that it expects claimants to follow in the process of preparing their R&D claims. The onus of following these steps and maintaining the necessary supporting documentation has been placed on the company, mainly, the company’s competent professionals (CPs). The CPs thus have the initial responsibility for identifying eligible projects, as well as detailing their rationale for this.

As part of this process, the CPs will also be required to document the following for each project:

  • confirm that the project relates to a qualifying field of science or technology, explaining how each project is a part of the identified field;
  • name the exact uncertainties the projects were trying to resolve and for each, why the solution was not readily deducible;
  • set out the state of relevant knowledge in the field and why resolving these would represent an advance in the field at the time the work was undertaken;
  • confirm that this work represented an overall advance sought and the field of science/technology the advance relates to;
  • identify the start and end of the uncertainty; document the plan for resolving the uncertainties; and, the steps taken to resolve the uncertainties.

HMRC’s guidance further explains in detail, with examples. the following points:

  • who a competent professional is within the company;
  • how to identify qualifying R&D activities.

Record keeping

Other than documenting the abovementioned information for individual projects, HMRC also seeks to understand the overall approach taken to identifying eligible projects and qualifying costs. This may include details of any sampling approach the CPs may have used in assessing R&D eligibility.

Other evidence HMRC may want to see in relation to claimed projects

HMRC expects claimants to be able to supply other evidence demonstrating that a project exists. This may include planning material, expense records as well as other records the company may maintain internally such as:

  • project charts, drawings, designs;
  • test results
  • photos of prototypes
  • minutes of meetings
  • email exchanges, etc.

To make the entire process easier, HMRC suggests the gathering of project information, including details of the scientific/technological advance(s) sought, uncertainties faced and the work done to resolve these, is done contemporaneously.

The competent professional

The guidance also goes into detail in terms of who the competent professional is. In summary, the CP is someone suitably qualified or experienced in the field. HMRC expects a competent professional to have all the following attributes:

  • they must be knowledgeable about the relevant scientific or technological principles involved
  • they must be aware of the current state of knowledge in the field as a whole
  • they must have accumulated experience and have a successful track record.

A competent professional may work for your company, or they may not. Examples of who is a CP are also provided.

Summary

In summary, HMRC expects the claimant company to maintain adequate records and documentation to support any R&D claim made. The claimant or its agent, supported by the CP should subsequently review this documentation to identify qualifying activities and costs, to compile the claim.

Our thoughts

HMRC is already asking for this level of information through their enquiry process. For recently submitted claims, if not already in place, it may be worth ensuring that detailed documentation is gathered, in line with HMRC’s guidance, should this be subsequently requested.

For upcoming claims, planning will be essential. We envisage the company and its R&D agent to work even more closely than before. Some essential steps will include:

  • the agent recapping on the R&D definition and its meaning with the CPs;
  • discussing how eligible project activities may be identified by the CPs;
  • discussing the types of documentation that the CPs can start gathering as part of the claims process. This should also include putting in a process that facilitates the quantification of costs by individual R&D projects.