Surprisingly, HMRC doesn’t set out any specific record-keeping requirements when it comes to R&D tax claims. It recognises that every business operates differently and the way they keep their records will reflect this. HMRC also understands that first time claimers won’t have fully audited records. However, it’s still important for business to establish a reliable record-keeping system as early as possible. This will only improve the success, and possibly enhance the value of their claim refund. More funds means more projects and less chance of HMRC questioning the claim.
With that in mind we want to share nine good practice habits for businesses to establish when it comes to record-keeping.
BUT FIRST, WHY ARE RECORDS SO IMPORTANT?
Quite simply the records of the time and money invested on research and development are the audit trail for the R&D Tax Relief claim. To make a claim, a business need to be able to realistically prove to HMRC their expenditure. The records need to: demonstrate a systematic approach to R&D activity, evidence all qualifying spend and validate any innovations made were not ‘by chance’. Without records there is no claim.
1. KEEP A LIST OF PROJECTS
The simplest and most effective thing a business can do, is setup a list of all the R&D projects the business has worked on over the last 12 months, including any new ones. If there is any doubt about whether a project is R&D, stick it on the list and start recording. It’s better to have the information recorded when it comes to crunch, so it can ruled out by a specialist. If it’s not listed, it won’t even be considered.
WHAT COST INFORMATION SHOULD BE RECORDED?
Here’s an overview of the key information to record for an R&D project:
2. DIRECT PEOPLE COSTS
A record of time spent by directors, employees, and any other qualified staff working on R&D projects. These records will be used to apportion the salary and any other costs that can be allocated to the claim. First job is to identify the projects each employee worked on during the year. Then for each project the qualifying R&D activity delivered by the employee and the time taken. Records include:
Salary (pension, NIC, Bonuses)
Reimbursed Expenses – Any travel, accommodation, subsistence costs related to R&D project and reimbursed via an expense claim.
Time sheets if applicable (we will talk timesheets later!)
3. SUBCONTRACTOR COSTS
A record of all subcontractors (connected and unconnected) working on any R&D projects.
Connected subcontractors, are those where two companies are controlled by the same person or are part of the same group. A record should be kept for all ‘paid for’ subcontractor invoices. We’d always recommend splitting up the two categories to record connected subcontractor costs and unconnected subcontractor costs separately. Records include:
Invoices relating to all these costs
Contracts
Time sheets if applicable
4. MATERIALS & CONSUMABLES
A record of costs for all materials and resources consumed as part of an R&D project, this includes materials, water, light and heat. Records include:
Invoices relating to all material costs.
Invoices relating to water, light and heat costs
5. SOFTWARE COSTS
A record of all software licences used, specifically on the R&D project. If the software was bought for use in the R&D project only, 100% of the price can be claimed. However, if the software is only intended to be used partly in the R&D project the costs will need to be apportioned.
Records include invoices relating to all these costs, and what they were used for.
6. RELATED PROTOTYPE COSTS
A record of all costs linked to the design and production of a prototype needed to test the R&D project. We often see this one slip through the net!
Records include invoices relating to all these costs.
SETTING UP RECORD-KEEPING SYSTEMS
The best place to start is with the systems or processes already in place for record- keeping and identifying how they can be modified or enhanced to be even more accurate. Here’s some ideas you can share for different levels of record keeping systems that can be introduce into business processes, starting with people time.
7. PEOPLE TIME SYSTEMS
Cloud-based timesheets
Timesheets are perfect for recording employee time spent on R&D projects and provide a great audit trail for an R&D claim. There are loads of systems such as Meistertask, Trello, Asana and Basecamp, which can be used to record and track all project related activity, including people time.
However, these systems do require commitment and rely on timesheets becoming an integral part of a business culture. Employees will need to log all the activity, and the number of hours spent against a specific project. If it can be adopted, it is really effective way to report on employees contribution to projects. We can recommend a free app called Clockify, which enables reporting on individual employees, or teams & R&D projects and export reports.
Spreadsheets
Spreadsheets can easily do the trick. Some businesses might find it easier to get started with a spreadsheet and trial whether timesheets is something that could work for the business. The same logic applies; log projects, tasks and time spent at the end of each day. Review this weekly/monthly to record all time spent.
Email calendars
If business use Outlook or Gmail calendars to log ALL meetings and tasks, a sensible way to trial out timesheets, is by using the categories feature. Simply set up a colour code system for R&D projects and when scheduling time apply the correct colour. At the end of each week it’s very easy to estimate the time spent across different projects in the business.
Project meetings
It might be that a timesheet system isn’t right for a business, and that’s okay. If that’s the case, meetings could be an opportunity to take minutes and record the input from employees involved in R&D projects. A weekly project meeting, or an R&D slot in an existing team meeting could be the answer. But no one likes a meeting for meetings sake!
8. OTHER R&D COSTS: MATERIALS, CONSUMABLES, SUBCONTRACTORS…
For all other costs, the accounting system is key. Businesses can set up R&D codes for each project within their nominal ledger. Codes can be allocated to expenses from expenditure on, materials, sub-contractors, consumables, software licenses. However, the code system needs to be clearly communicated to everyone that will be expected to use it. We have had cases where clients have taken this a little too literally and started to record EVERYTHING under the new codes! Oops! That’s one way to get an HMRC enquiry…..
9. SUBCONTRACTOR PROJECTS
Where subcontractors are working on projects outside of the scope of R&D, it’s all about communication. Businesses just need to identify R&D project work and ensure they stick to it. Little tips like this just make it easier to add invoices to systems accurately using the correct code. It’s all about the quick wins!
Now that’s lots of information to take in, to ensure record keeping is accurate for clients’ R&D Tax Relief Claims, but that’s where we are here to help!
YOUR R&D TAX RELIEF SERVICE
For DTX’ers with a potential R&D Tax Relief client you’d like to discuss please book a scoping call here.
Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.
Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.
For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:
SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).
RDEC – the credit rate has increased from 13% to 20%.
Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.
For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.