How certain is your R&D claim?

22 September 2021

Although the government is currently consulting on ways to enhance Research & Development (R&D) tax reliefs for the future, one thing that will not change is that they are targeted reliefs – not all projects will qualify and not all costs for qualify projects can be claimed. HMRC is bolstering this targeted approach by recruiting 100 new inspectors to scrutinise R&D claims – so there will be a higher chance of R&D claims being investigated in the future.

Private equity backed businesses

Businesses in all sectors know that they must become increasingly agile to compete with ‘disrupter’ businesses ‘moving the market’ - innovation has never been more important to everyone’s business models. So it no surprise that innovative businesses attract substantial investment from PE houses seeking high growth opportunities. However, where R&D relief plays a significant role in the financing of a high growth business, HMRC is increasingly focusing on testing what type of R&D relief the business can claim. We understand that HMRC is looking much more closely at whether each PE backed business can meet the qualifying conditions for the more generous SME scheme rather than the R&D Expenditure Credit: it appears a test case may be on the way soon. 

Other reasons claims are investigated

It is common sense that if you don’t understand something you are more likely to be suspicious of it and this holds true for R&D tax inspectors. While there are highly skilled teams at HMRC’s R&D tax relief units they are not clairvoyant and not necessarily software experts. Therefore, supporting your claim with suitable details (eg a step by step narrative explaining the project and the technological innovation it is intended to lead to) can drastically reduce the risk of a claim being challenged. Of course, if R&D claims are prepared by the finance team, providing such information may be a challenge in itself.

Similarly, insufficient detail and explanation of the project costs claimed and ‘suspiciously unsubstantiated’ (ie rounded!) costs are bound to draw a Tax Inspector’s eye. HMRC officers can recognise where claims are out of kilter with similar projects and will query unusually high costs. That is one reason why BDO has developed a benchmarking tool for R&D claims so that our clients can check whether they will be perceived as over-claiming by HMRC or where they are potentially under-claiming. 

Cost implications

Dealing with post submission enquiries into an R&D claim is an expensive way for businesses to learn about the R&D claim process and certainly not a cost-effective way for any business to operate. It is far more efficient to get an external expert in from the start to make sure that relevant data is captured as you go along and that your claim is forensically reviewed before submission so the potential for challenge by HMRC is all but eliminated. Reducing this risk means no wasted effort for your business, more certainty over amount of relief available and, usually, a quicker tax rebate.

Read more on proposed reforms to R&D reliefs.

BDO R&D Toolkit 

BDO have developed a proprietary R&D AI Toolkit to provide a benchmarking number along with a “Priority” rating for claim risks and opportunities as well as allowing you to estimate your potential R&D claim value.

The R&D AI Toolkit can be used to:

  • Benchmark R&D claims against companies of a similar size and the industry sector average
  • Receive suggested Priority Ratings for risks and opportunities
  • Reduce the risk of errors and penalties for incorrect R&D claims
  • Gain clarity and assurance when you calculate your R&D claim

BDO’s R&D AI toolkit is available for purchase on BDO Store. 

Download now for a hassle-free R&D claims experience