By Emma Lewis, Myriad Associates
COVID-19 and the lockdowns that came with it are still having a huge impact on large numbers of UK businesses today. Many are now looking for ways to boost their financial prospects, not just in the short term but the longer term too.
According to data from the Enterprise Research Centre, 61,472 limited companies ceased trading between the beginning of March and the middle of April 2020- a staggering 70% increase from the same time in 2019. And yes, this was some time ago now – but the knock-on affects are still very much with us.
Research and development (R&D) Tax Credits offer a lucrative financial incentive that encourages UK companies to innovate and grow. If a business has made an appreciable advancement in science or technology, and invested money in doing so, then it can receive up to 33 pence back from HMRC for every £1 of R&D expenditure. The scheme is open to companies of all sizes in all sectors, regardless of profitability, and offers either a reduction in Corporation Tax or a cash lump sum. For many companies throughout the pandemic, such a generous tax incentive has proven to be a lifeline.
So what’s difficult about claiming?
Although the scheme is very generous, putting together an application is a complex process and it’s easy to make a mistake.A comprehensive technical report also needs to be submitted alongside the relevant figures to describe the project in detail and what it set out to achieve.
Essentially, applicants must understand that the onus is on them to demonstrate and prove their own eligibility. It’s not down to HMRC officers to have to sit and detangle an R&D Tax Credits application that’s unconvincing, unclear or hard to read.
Before getting started
Check if your project is actually eligible (the Gov.uk website may be useful here).Remember that R&D Tax Credits can be claimed up to 2 years after the end of the accounting year during which the work took place.
There is no standard HMRC format that a technical report needs to be presented in. However, a good place to start is with a background of the company so that the R&D project has some context.
There are two objectives here
The first is successfully obtaining the relief, which is after all the whole point of the exercise. But the second objective is to avoid an HMRC enquiry.
The technical narrative is a comprehensive, cohesive document that presents the company’s R&D work in such a way as to pass HMRC inspection without further questions. It’s essential that narratives are done thoroughly and accurately, because HMRC enquiries are especially time consuming and potentially very stressful. Well described technical reporting is unlikely to raise any issues, but if it’s unconvincing or poorly presented then HMRC may well request further investigation.
Use the right language
The language used in writing a technical report must be professional and concise with no waffle. Technical issues should be described in plain English with as little jargon as possible. Having said that, technical complexities shouldn’t just be skimmed over either – enough detail is essential in accurately supporting the claim. It’s a balancing act that requires some skill, which is why it’s highly recommended companies take advice from an expert R&D tax consultancy from the outset.
For reference, there’s a very useful page on exactly how to write in plain Englishon the (aptly named) Plainenglish.co.ukwebsite which may prove handy.
What the technical narrative should demonstrate
The technical narrative should not be compiled by one person only, instead incorporating input from all team members involved in the project. It’s also crucial that the specific nature of the uncertainty addressed is detailed accurately, as this helps ‘prove’ to HMRC that the problem couldn’t be solved easily by someone working in the field.
The R&D technical narrative should provide a compelling demonstration of:
- What scientific and/or technological innovation the company undertook
- What challenges were faced
- What the limitations were
- What resources were needed in terms of staffing, overheads and materials
- What outcomes were achieved
Match the finances to the technical data
In the course of putting together a technical narrative it’s easy to drift off the point. It may seem obvious, but applicants need to make sure that the technical report matches and describes the specific figures that go alongside it. Not only is this the quickest route to success, but it again helps to avoid HMRC enquiries. As much of the qualifying expenditure as possible should be accounted for, including staff wages, subcontractor costs, materials and utilities, to maximise the value of the claim.
In finishing, it’s important to note that even if a company has successfully applied for the relief many times before, each project and set of costs are unique and there’s no room for complacency. COVID-19 has brought hard times for many UK businesses and an unsuccessful R&D Tax Credits claim can be the difference between surviving and not. With this in mind, it’s more important than ever that R&D Tax Credit applications go smoothly. Crafting the perfect technical narrative is a crucial part of that.
According to latest government R&D tax statistics, for the year ending March 2020 an impressive 85,900 R&D Tax Credit claims were submitted generating £7.4 billion in relief. Could your company be next to benefit?