HMRC has recently released some guidelines to help companies understand what is considered R&D for the R&D tax credit. The Guidelines for Compliance (GfC) are designed to assist companies as they determine if their work qualifies as R&D for tax purposes and to avoid common mistakes.
HMRC has been cracking down on R&D tax claims, particularly as they repeatedly see fraudulent – or simply misinformed – claims for unqualified work.
R&D for tax purposes is defined in s1006, Income Tax Act 2007: “activities that fall to be treated as R&D in accordance with generally accepted accounting practice (GAAP)”. However, s1006 also introduces a regulation-making power to specify activities that are and are not to be treated as R&D.
Current regulations, for all accounting periods after 1 April 2023, follow the Research and Development (Prescribed Activities) Regulations 2023, SI 2023/293. These cross refer to guidelines on the meaning of R&D for tax purposes, issued by the Department for Science, Innovation and Technology (DSIT).
HMRC repeatedly sees misunderstandings of what is and is not R&D under these DSIT guidelines. It is their hope that the GfC will expand on DSIT regulations to make the distinctions of R&D more clear for all taxpayers.
At a high level, the GfC set out:
- HMRC’s expectations of claimants;
- who is a competent professional, able to judge if a project is seeking an advance in science or technology for the purposes of an R&D claim;
- how to identify qualifying R&D projects; and
- a recommended approach to claims and record keeping.
HMRC’s Expectations of Claimants
HMRC expects claimants to have a competent professional with experience in the relevant field of science or technology to identify relevant projects, confirm they relate to a qualifying field of science or technology, and briefly explain how each project relates to the field. Further steps include outlining uncertainties and how this would advance the field.
Specific steps and expectations can be found here.
Importance of a Competent Professional
HMRC states they will reduce the value of some claims to zero if a competent professional has not identified that a company was seeking an advance in science or technology. They want it to be clear that a competent professional is not simply someone who works in a field or has an intelligent interest. A competent professional must have enough knowledge and experience relevant to the qualifying project.
In respect of their field of expertise, HMRC expects a competent professional to have all the following attributes:
- they must be knowledgeable about the relevant scientific or technological principles involved
- they must be aware of the current state of knowledge in the field as a whole
- they must have accumulated experience and have a successful track record
- A competent professional may work for your company, or they may not.
Further details, including appropriate evidence of being a competent professional, can be found here.
How to Identify Qualifying R&D Activities
Focused on helping to clarify what activities qualify for R&D tax reliefs, the guidance states that taxpayers should continue to refer to the 2004 BIS guidelines when preparing claims for accounting periods which begin before 1 April 2023.
They state that R&D activities must be part of a project where a project consists of a number of activities conducted to a method or plan in order to achieve a goal. The project must seek to resolve specific uncertainties to achieve an advance in a qualifying field of science or technology.
They then clarify that HMRC has seen claims where a company may have made advances in science and technology, but not as part of a project to resolve identified uncertainties. No R&D relief was allowable in these cases.