A summary of HMRC’s Guidelines for Compliance for claiming R&D relief

To help businesses understand if their work qualifies for R&D Tax Relief and to make sure that companies avoid making errors, HMRC has released Guidelines for Compliance.

These guidelines don’t introduce new rules, instead they aim to clear up confusion by clearly setting out what qualifies for R&D Tax Relief. The guidelines provide recommendations for how to record evidence while undertaking R&D projects. The document also gives general advice and examples to help businesses better understand what constitutes research and development for tax purposes. 

As such, it’s a useful document for any company planning to do R&D, currently undertaking R&D, or even for those gathering evidence for a claim retrospectively.

The core piece of advice, stated repeatedly through the guidance, is to keep records of any R&D work undertaken. This is the best way to ensure that you can claim for everything associated with qualifying R&D, but it will also dramatically reduce the risk of making any mistakes while claiming. The guidelines also recommended that businesses refer to the DSIT Guidelines on the meaning of research and development for tax purposes. The guidance applies to both RDEC and the SME R&D Scheme.

The guidance covers:

In this article, we summarise HMRC’s R&D Guidelines for Compliance to help businesses prepare their R&D Tax Relief claims compliantly.

Expectations of claimants

The Expectations of claimants section lays out the fundamentals for deciding as to whether or not your project qualifies as R&D for claiming tax relief.

If you want to make any R&D Tax Credits claim, you’ll need a competent professional to

identify and explain how your projects sought to create new knowledge in science or technology. They’ll also have to outline the uncertainties these projects aimed to resolve and why they weren’t easily deducible.

You must give details on the “uncertainties” faced. For example, what knowledge is currently in the public domain? How would overcoming these uncertainties advance what we know now? You’ll also have to put together a plan on how any uncertainties were approached and resolved, and in terms of claiming for your expenditure, you’ll need to record each activity that has contributed directly and indirectly to resolving the uncertainties, including costs (which will be the basis of your claim).

Importance of a competent professional

The guidance covers the importance of a competent professional by explaining what such a professional is and what their role is during the R&D process.

Essentially, a competent professional determines the need for a scientific or technological advancement to overcome an uncertainty.

To be considered competent, they must have relevant expertise, knowledge of the field, and experience as evidenced by their qualifications, experience, publication record, awards, and any recognition they’ve received. They don’t have to be an employee of your company, although they’ll need to be familiar with your R&D project.

Their opinion should clearly explain their understanding of the field, the sought advance (i.e., what problem is trying to be solved?), and its significance to advancing the existing knowledge of science or technology.

How to identify qualifying R&D activities

Being able to identify qualifying R&D is one of most important parts of putting together a successful claim, but it’s also an area where many companies struggle and where they can benefit from expert advice. The guidelines break down how to identify qualifying R&D activities into several sections:

We summarise each of these sections below.

You must have a qualifying project (and be able to identify the R&D qualifying boundaries of the project)

Your R&D activity has to be part of a wider project that aims to resolve a specific scientific or technological uncertainty (any advances made outside of such a project won’t qualify for relief). It’s, therefore, essential to separate qualifying R&D activities from other development work, and only activities directly contributing to resolving the scientific or technological uncertainty are eligible. Simply put, a qualifying project starts when work begins to resolve a specific scientific or technological uncertainty and ends when the uncertainty has been overcome (or you have achieved your desired advance).

It’s important to distinguish between scientific or technological and commercial uncertainties. Commercial uncertainties, such as trying to find a market for your new product, don’t qualify for any relief.

Qualifying field of science or technology

Qualifying scientific fields include studies of our physical universe, like physics and applied sciences such as medicine or biotechnology. For expenditure after 31 March 2023, mathematical advances are also treated as a qualifying science. Qualifying technological fields must apply scientific knowledge practically, such as in agriculture, construction, manufacturing, or engineering. It’s also possible for a doctor working to develop medical technology (which deploys both pure science and technology) to carry out a project that qualifies as R&D. Specialised applied scientific fields like computer science and sports science may also be eligible.

Qualifying advances and uncertainties in science or technology

To make a qualifying advance, you need to have sought an overall progression in knowledge or capability – so you can’t have just improved something within your own company.

This could involve creating new products, improving processes, or generating new knowledge. Usually, this means you’re trying to develop or improve a process, material, device, product, or service (however, routine improvements and adaptations do not count).

Qualifying activities / costs

Any qualifying activities must directly contribute to resolving scientific or technological uncertainty, such as planning, designing, testing, and creating or adapting necessary software, materials, or equipment.

Qualifying costs must be apportioned reasonably. For instance, if an engineer spends 50% of their day on R&D, then you should only claim 50% of their salary.

Indirect activities can also be claimed as long as they form part of a qualifying R&D project. For example, you can claim for admin staff directly supporting an R&D project but not for general overheads like payroll management.

Recommended approach to claims and record keeping

The guidelines provide a recommended approach to claims and record keeping. It includes four useful steps for good record-keeping for claims:

1. If planning a project, consider if it requires new knowledge or techniques in a relevant science or technology field.
2. Write down the advances you aim to achieve.
3. Write down the uncertainties you’re trying to resolve, along with your proposed steps for trying to resolve them. Keep the plan proportional to the project’s size and cost – a simple list of bullet points may suffice for smaller projects. For larger projects, detailed records will likely already exist.
4. Seek an expert opinion, preferably from someone involved in the project.
   
   

While HMRC repeatedly stresses the importance of clearly defined projects for claiming R&D, if a project was not clearly defined at the time, it’s OK to retrospectively class something as a project if it involved work that sought to make a qualifying scientific or technological advance.

Records should always be kept as a matter of best practice. This is to make it easier to identify qualifying projects and costs for accurate claims (although you’ll only need to provide evidence if HMRC decides to check your R&D claim). Examples of evidence include documents, designs & drawings, photos, prototypes, employee interviews, project charts, test results, email exchanges, minutes of meetings, and any other relevant records.

If there are any gaps, it’s also possible to provide recollections and detailed explanations of the work that was conducted – but if you’ve kept good records, this will only be needed sparingly.

How Leyton can help

If you’re still not sure about what qualifies, and what doesn’t, or if you have any concerns about how to make your claim compliant without missing out on R&D Tax Relief, then we can help.

Our expert tax advisors have been working closely with HMRC for years. We sit on a consultive committee for R&D incentives, meeting with them regularly. As well as identifying qualifying expenses, we’re able to ensure that all claims are made in line with the latest regulations.

Speak to an expert tax advisor to find out more.

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