Demystifying Indirect R&D Activities

Navigating the intricate world of Research and Development (R&D) tax relief can be a daunting task for businesses and accountants alike. As the regulations evolve, understanding the nuances of indirect activities has become crucial for maximizing tax relief claims.

With the introduction of the additional information form for R&D claims on 8th August, businesses are now mandated to separate their direct and indirect R&D activity costs. This adds a layer of precision to R&D tax relief claims, highlighting the importance of a robust and accurate process for compiling your claim.

Defining Direct and Indirect Activities

First and foremost, let’s distinguish between direct and indirect R&D activities. Direct activities encompass the creation or adaptation of software, materials, or equipment aimed at resolving scientific or technological uncertainties. This includes scientific or technological planning, design, testing, and analysis. Importantly, these activities must exclusively serve R&D purposes.

HMRC does acknowledge certain indirect activities that are integral to R&D projects can qualify as R&D under the scheme. These activities support the overall project but may not directly contribute to resolving scientific or technological uncertainties. These activities are a key area to consider for R&D tax claims and in some instances may make up a majority of your claim.

Qualifying Indirect Activities

So, what qualifies as an indirect activity? According to HMRC guidelines, it encompasses a broad spectrum of supportive endeavours, including:

  • Maintenance, Security, and Administration: These activities ensure the smooth operation of R&D projects. Keeping your facilities secure and maintaining R&D equipment is essential.
  • Finance and Personnel: Accounting, payroll, and other financial and HR activities that directly pertain to R&D projects can be claimed.
  • Ancillary Activities: Activities such as hiring staff, leasing laboratories, or maintaining equipment, including computers used for R&D purposes, are considered qualifying indirect activities.
  • Training: Any training necessary to support R&D projects can be claimed.
  • University Research: Research conducted by students and researchers at universities is eligible for R&D tax relief.
  • Methodology Development: Research to devise new scientific or technological testing, survey, or sampling methods, when not R&D in itself, can still contribute to your R&D tax relief.
  • Feasibility Studies: If they help shape the strategic direction of a specific R&D activity, feasibility studies can be claimed.

Non-Qualifying Indirect Costs

However, not all indirect costs are qualifiable. Costs related to transportation and carriage, production of goods and services, or non-technical or non-scientific aspects of a new product or process (e.g., aesthetics) are not eligible for R&D tax relief. It is important to understand what costs do not qualify in order to ensure the legitimacy of your claim.

In conclusion, understanding the intricate landscape of indirect R&D activities is paramount for businesses and accountants aiming to optimize R&D tax relief claims. By identifying and segregating direct and indirect costs accurately, businesses can unlock the full potential of R&D tax relief, fostering innovation and driving their bottom line.

Given the complexity of R&D tax relief claims and the ever-evolving regulations, engaging an experienced R&D tax advisor can be a wise strategic move. Their insights can help ensure that your company maximizes its R&D tax relief entitlement while staying compliant with HMRC guidelines. So, whether you’re a business venturing into the R&D tax relief arena for the first time, an experienced user of the scheme, or an accountant aiming to expand your knowledge, expert guidance can make all the difference.

If you would like to understand more about the difference in direct and indirect activities, and would like to discuss your own claim, please do get in touch with our expert team who will be happy to help.

Meriden MP Saqib Bhatti MBE Visits Our Office to Discuss R&D Tax Relief Schemes

We are delighted to share an exciting update – the visit of our local MP Saqib Bhatti MBE.

Last Friday 8th September, our team had the pleasure of hosting Mr. Bhatti for a discussion on the intricacies of the Research and Development (R&D) tax relief schemes and navigating HMRC, a topic close to his heart as a chartered accountant with his family accountancy practice based in Birmingham.

Our company was founded on the principle of supporting UK Plc by nurturing innovation and assisting our clients to recover some of their costs via the HMRC R&D schemes. We firmly believe that innovation requires a willingness to take risks and we want to support companies that have the courage to do so. We welcomed the opportunity to convey our passion for the scheme and its role in fostering innovation. We are thankful that he shares our perspective on the scheme’s pivotal role in promoting and supporting innovation throughout the UK.

The focus of our conversation primarily revolved around the challenges that businesses are currently facing when engaging with HMRC in relation to R&D tax relief claims. Here are some of the key points that were discussed:

Guilty Until Proven Innocent: One major concern is that many businesses are feeling they are being accused of wrongdoing by default. HMRC’s approach presumes inaccuracy of legitimate submissions rather than supporting and assisting businesses with their investments and furtherment of their R&D innovations.

Small Business Struggles: SMEs, in particular, are finding it difficult to navigate the complexities of R&D tax relief schemes. The time, expense and effort required to contest HMRC decisions can be prohibitively high, leading many businesses to reluctantly concede or withdraw their legitimate claims rather than fight for the funds they are entitled to. This results in HMRC interpreting these withdrawals as being fraudulent and recorded as such. We believe this is fundamentally skewing HMRC’s conclusions regarding the volume of claims seen as non-compliant. Smaller claims appear to be targeted by HMRC, as they appear to be ‘easy pickings’ in terms of the number of claims being overturned by the HMRC team and operating businesses need to make commercial judgments, which all too often means they are forced to concede.

Scheme Changes: The recent changes in the schemes favour large companies. They will see their benefit increase by 50%, while small businesses will see their benefit reduced, by as much as half.

HMRC’s Role: There was a consensus that HMRC has not adequately managed the R&D tax relief scheme. While they have promoted it as government support to encourage innovation, HMRC have openly admitted the service provided to R&D specialist advisors and client businesses has been extremely poor.

Discouraging Innovation: The onerous compliance checks and perceived adversarial stance of HMRC are discouraging innovation within the business community. This is counterproductive to the very purpose of the R&D tax relief schemes.

Inexperienced Caseworkers and Out of Date BEIS Guidelines: Another noteworthy issue that surfaced is the recent influx of some 300 new HMRC caseworkers who at HMRC’s own admission lack comprehensive training, prior experience with the R&D tax relief schemes, and scientific or technological knowledge. This has led to instances where caseworkers disagree with competent professionals in the field, resulting in the rejection of claims. This is further exacerbating the challenges faced by businesses seeking legitimate relief under the scheme. HMRC will not speak via telephone or Teams/Zoom and they will only appoint a technically qualified caseworker when the case is escalated to Alternative Dispute Resolution (ADR). We fail to understand how non-technical and poorly trained workers can have the power to reject claims

The welcome news is that Saqib Bhatti MBE is aligned with our mission. He has not only understood our concerns but has also agreed to engage with relevant ministers and colleagues who may be able to address these issues. This is a significant step toward fostering a more innovation-friendly environment for businesses in the UK.

As we look ahead, we remain hopeful that our discussions with Mr. Bhatti and the support of like-minded individuals will lead to positive changes in the way R&D tax relief schemes are managed and perceived. Thank you for being a part of our journey, and we look forward to keeping you updated on further developments in this important endeavour. Together, we can continue to champion innovation and progress for UK Plc.

Managing the New HMRC R&D Tax Credit Additional Information Form

As we have discussed previously, from 8th August 2023 all companies making an R&D claim must first ensure they have submitted an additional information form. This form details the technical and financial information that makes up your claim. We have detailed the requirements of this form and how our reports comply in a previous article found here.

The new form must be completed before a company’s R&D claim is submitted to HMRC via the CT600. Its purpose is to provide HMRC with a more comprehensive understanding of a company’s R&D activities. While it may seem like an additional administrative burden, we aim to relieve as much of that burden from you as possible.

The Consequences of Non-Compliance

In a recent communication from HMRC, it has been revealed that since the 8th August, almost half of companies failed to complete the Additional Information Form before submitting their R&D claim. This has significant consequences. HMRC can use powers under Paragraph 16, Schedule 18 of the Finance Act 1998, to remove the R&D claim from your CT600 where an additional information form has not been completed. This was confirmed in a recent letter to the Chartered Institute of Taxation.

While for some companies, this can be resolved by completing the form and resubmitting, companies who have submitted their R&D claim towards the end of the 2-year claim window may find themselves time barred from making a claim if the issue cannot be resolved within the eligible window.

How We Can Help

At BTA Services, we understand the challenges businesses face in navigating the evolving landscape of tax incentives and compliance. Our team is dedicated to ensuring our clients fully benefit from the R&D tax credits scheme without getting caught up in additional red tape.

As part of our service, we offer to complete the Additional Information Form on your behalf, streamlining the process and reducing your administrative burden.