Behind the scenes: How to turn a ‘good’ R&D tax credit claim into a great one
R&D tax credits are a funny part of the tax system.
Normally, tax is about paying money out; but with R&D tax credits you receive a cash boost. This leads to a peculiar situation where an innovative tech company may be delighted with what is, in truth, a really poor outcome.
“Hey, here is your tax credit worth £100,000!”
“Great, that was just what our cash flow needed…what a great service!”
But what is not understood is that, had the claim been properly optimised, it would have been worth £250,000 or more!
Adam Kotas, a Director at leading R&D tax credit consultancy ForrestBrown, discusses what goes on under the bonnet when preparing an outstanding R&D tax credit claim for a tech business.
Adam, where does an R&D tax credit claim begin?
Interestingly, not with R&D! Before we start talking about innovation with a client, we like to go back a level and really get to understand their business. Ask questions like “What is the company structure?” “Is it part of a larger group?” “How do the various business functions interact with each other?” Whilst not addressing the R&D they help inform the context behind that R&D, and ensure that nothing is missed.
We have new clients approach us asking us to review a past claim. And we find out that their previous adviser simply asked for a list of the ten most innovative projects that they undertook that year. Without first getting to know the client, they can’t possibly hope to catch all the nuances of a claim. And that is what we often find when the review is complete – sometimes we catch these before it is too late. Other times the damage has been done and the unwary client is out of time to re-submit the claim.
What kind of issues does spending the time doing this reveal?
Call it due diligence – who the right people are to talk to within a company. Whether there is a disconnect between the tech people and the finance people or senior management. If the company has been structured in a way that would disadvantage the claim. Has a grant been paid that would reduce the cash benefit of the claim? The point is, every company is different, and unless you spend the time finding out all the details you are unlikely to optimise the claim.
So you have the foundations in place, what comes next?
Now that we have that context, and we know the correct people to speak to, we can identify the qualifying R&D. This involves in depth conversations and applying our expert understanding of the government guidelines. It really helps to have Chartered Tax Advisers working on the case – professionals who know the tax legislation inside out. Of course, it is not just about the innovations, but also applying costs to the project. This is where we tend to spend most of our time. Here, it is important to know what HMRC is looking for in a claim. You need to be able to robustly back up the numbers you are claiming for – preferably with documentary evidence.
What is HMRC expecting to see?
Analysis of costs derived from time sheets would be a good example. Ones that record time spent on specific projects, not just time at work. Now this is unlikely to be in place for a first time claimant who may not have understood the R&D tax credit scheme when they did the work – and HMRC will probably accept something more anecdotal. But for regular claimers it is essential to build thorough record keeping into your processes – something we have always emphasised and encouraged – because HMRC is taking an increasingly dim view of businesses that don’t.
The bottom line is, the more robustly you can demonstrate the costs of an R&D project, the smoother the process with HMRC. And the more costs you are likely to be able to successfully include in the claim.
So advanced planning is a big help?
Absolutely. Once you have a culture of R&D you should be planning and strategising to get everything in place for the R&D tax credits claims process. They may be claimed retrospectively, but that doesn’t mean they should be an afterthought as this is a cash generative claim.
The companies that we see get the most out of the R&D tax credit system are the ones that plan for it. When I say ‘most’ I don’t just mean in terms of money. It’s a mindset – innovation breeds more innovation. Good practice leads to more good practice. And that is what the government is trying to encourage with the scheme in the first place. I see huge benefit for companies that build this into their approach rather than taking a purely compliance-led attitude to corporation tax.
Any more advice for SaaS and other tech companies claiming R&D tax credits?
An interesting thing about SaaS claims in particular is identifying where the project ends. We see claims prepared by other advisers where they capture everything up to the point where the product gets to market. However, they miss out the extensive work done post-sale, when the software is adapted to integrate with the end-user’s systems. Potentially a big, expensive mistake and one that the SaaS provider could never know was made!
A more general piece of advice is quality assurance. Ensure your claim is double checked before submitting it. Check against the legislation and guidance from HMRC. Check against the records that you have included. And check you have included everything within the scope of the project.
If you would like to have a confidential discussion about reviewing an R&D tax credit claim, please contact Adam Kotas at ForrestBrown on 0203 519 5080.
Post produced in partnership with Adam Kotas, Director at ForrestBrown.