The Top 5 Mistakes Companies Make When Claiming R&D Tax Credits in the UK

_‍Research and Development (R&D) Tax Credits, also known as R&D tax relief, can be a valuable incentive for companies with a UK presence that are investing in innovation. However, the schemes legislative and technical complexity means that mistakes in R&D tax relief claims are not uncommon. These errors can trigger an HMRC enquiry, that require significant time to respond to and resolve, and if the company is unable to satisfy the queries, then penalties are always considered.

This article explores the top five mistakes’ companies make when claiming R&D Tax Credits and how to avoid them, to ensure that the R&D claim is submitted correctly.
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^{1. Misunderstanding What Qualifies as R&D for tax purposes}‍

One of the biggest mistakes companies make is misinterpreting what qualifies as R&D for tax purposes.

The definition of R&D as defined in the DSIT(Department for Science, Innovation and Technology) guidelines is very broad. According to these guidelines the project must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. The derived solution must not be readily deducible by a competent professional, and the work should have followed a systematic and logical process.

This definition, whilst enabling many projects across a wide variety of industries to fall within scope, also leaves significant headroom for misinterpretation about what constitutes R&D activities. As such, when judging projects, it’s critical to ensure that thorough background research is conducted so that the advance can be adequately judged and the competent professional must be able to detail and evidence how the work done was seeking to advance beyond the existing baseline.

If there is an enquiry into the R&D claim for a company, then often it boils down to a discussion between the HMRC inspector, and the competent professional at the company to judge whether the advance sought was sufficiently beyond the baseline or whether the solution was truly non-readily deducible. It is essential that the competent professionals involved in the project understand the definition of R&D for tax purposes from the outset of the claim preparation.

^{2. Inadequate Documentation and Record Keeping}

Proper technical documentation is essential to substantiate R&D tax relief claims, in order to demonstrate the uncertainties encountered and understanding that R&D activity would be required within a project.

While there is no specific record-keeping format required specifically for the purposes of claiming R&D tax relief, but the Corporation Tax Self-Assessment Act requires companies to keep sufficient records to support all tax returns, which applies here.

It is not unusual for a company to discover that an R&D project existed either before it began or after it had finished. In such cases, a company may not have specific R&D records or timesheets, making it difficult to justify the claim to HMRC. For smaller projects, records you normally create while carrying on your business are often enough to help identify a qualifying project and its costs at a later date.

Such records would need to be supplemented by there collections of people directly involved in the work at the time.  Whenever a retrospective approach is adopted, it should always be undertaken with a high degree of care and attention. Processes should be put in place to ensure contemporaneous evidence is accumulated throughout the accounting period, so the claim included in the relevant tax return is properly substantiated.

^{3. Over-Claiming or Misallocating Costs}

Another frequent mistake in R&D tax credit claims is including costs that do not qualify or having errors in over-claiming or underclaiming cost apportionments.  A common error is including costs that do not qualify under the R&D regime, such as routine overheads, training costs, excluded subcontractor costs, or expenditure incurred outside of the relevant accounting period. Errors in apportioning staff costs or including general business expenses can inflate the claim artificially and these claims would not clear an HMRC enquiry check, almost certainly falling under the careless category for penalty considerations.

Cost apportionments are used to include eligible costs where a portion of that cost is required. Whilst apportioning expenditure is perfectly allowable within the R&D tax credit scheme, it can be an area where mistakes are often made due to either under or over claiming those cost items. A reputable advisor is able to advise on how best the competent professionals can apportion costs, understand what records were maintained to support this, and, where possible, a reasonable and pragmatic approach should be taken that is rooted in the R&D steps taken and costs apportioned to those steps individually.

^{4. Missing Deadlines or Incomplete Submissions}

The R&D scheme has evolved significantly in the last few years, as a result of HMRCs efforts to improve compliance. This has resulted in there being a number of administrative steps that historically were not required. These are

^{1. Claim Notification Form (CNF):}

The CNF is a form that must be filed within 6 months of the end of the relevant accounting period, and the form provides gives a high-level summary of the R&D projects being claimed. The common mistake is for the claimant to either be unaware of the need to submit a CNF, or to miss the deadline for filing the CNF. The former of these is somewhat mitigated by the online guidance provided by HMRC, however, the rules for ‘grandfathering’ of claims are somewhat complex and could have been misinterpreted.  

^{2. Additional Information Form (AIF):}  

The AIF is a form that is submitted before the R&D claim, and it is submitted through the CT600 tax return. The AIF outlines the full technical details of the claim as well as a breakdown of expenditure by cost category for each project. If this form is not submitted before the CT600, then the subsequent R&D claim is invalidated even if a R&D report is provided alongside the CT600.

Whilst education around the administrative burden is improving, and any agent submitting R&D tax relief claims should be very well aware of filing requirements, this is still a mistake being observed by claimants.

^{5. Failing to Respond Promptly to HMRC Enquiries}

If HMRC raises an enquiry, it’s in the form of a letter that requests additional information to substantiate technical and financial elements of the claim. Some companies underestimate the importance of engaging constructively with HMRC, either ignoring correspondence or providing incomplete answers. This can escalate the situation unnecessarily and it is preferred to engage with HMRC in a constructive manner where timely and thorough responses are essential. As enquires often involve multiple stages and can be frustrating due to disagreements over finer legislative points, having patience and maintaining communication is the best way to reach a desirable outcome.  

Delays in responses or providing limited information will only serve to delay the resolution of the enquiry which doesn’t serve either party’s interests. Furthermore, evasive communication or a lack of responsiveness may be interpreted by HMRC as a lack of cooperation or even as an attempt to conceal errors. This can result in claims being denied, penalties being imposed, and reputational damage. Proactive engagement and transparency are key to resolving enquiries and maintaining a positive relationship with HMRC.  

^{Final thoughts on R&D tax credit claim mistakes to be aware of}

In summary, avoiding these common mistakes serves companies well in making an accurate R&D claim that should be processed by HMRC, without delay. Companies falling foul of these mistakes will likely end up with their R&D claim being removed or a lengthy enquiry that could result in penalties. Companies are advised to seek expert guidance, exercise good record keeping and communicate openly with HMRC to ensure a smooth and successful R&D tax credit claim process.  

We encourage you to have a conversation around R&D tax relief and if this is suitable for your business. At RCK Partners, we would be more than happy to faciliate this coversation. If you have any questions or would like to learn more about the scheme please read our R&D tax credit webpage, or get in touch.

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Written by Peter Clark PhD, Co-founder and R&D Technical Director.

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