A recent HMRC-issued report found that 16.7% of all R&D tax claims were wrong or fraudulent, resulting in an estimated £1.3bn of error and fraud. While there is some concern within the industry on how this data has been compiled – and a growing belief that some genuine claims are being challenged and denied – the fact remains that HMRC is determined to crack down on false claims..
Despite moves to simplify the application process announced at the recent Autumn Statement, the application process for R&D tax credits remains complex.
Changes to the scheme, including the introduction of an “Additional Information Form”, have increased the complexities involved in submitting a R&D tax claim meaning that there is far more room for error. The increased complexity around the application process means it is even more important that founders and their teams pay attention to detail when applying for this crucial tax break.
Tom Adcock, Tax Partner at Gravita, looks at 5 common weaknesses tech and software SMEs need to watch out for in their R&D applications that can affect their chances of success.
Lack of technological detail
As a general point, it is vital that the claim showcases research that involves technological advancements in the industry.
This means the claim must include detail that showcases research extending beyond the use of existing technologies and common software practices. To prevent research being seen as a non-advancement in the industry, it is vital that both the limitations and advancements of your research are included.
Overemphasis on functionalities
Rather than excessively detailing how the product works, applications must also ensure specific details on technological limitations and challenges are included, along with information about how the research completed has overcome or significantly improved them.
Showing the underlying work that has been done to overcome challenges and combat limitations is just as important as demonstrating product functionality. Remember, the most important thing to show in any R&D claim is that the work being done is advancing the industry by significantly improving a current limitation or challenge.
Custom coding expectations
In technological applications, a common misconception is that customised coding, which is modifying a preexisting code or product to the specific needs of a client, automatically qualifies under the R&D scheme. While custom code is new in the sense it is tailored to a client’s specific needs, the claim may be denied if the work seems to only include routine design and development rather than genuine technological advancements.
Applicants must go much further to illustrate the significance of their project. R&D submissions will only be accepted if HMRC view your work as something furthering the industry and so custom coding alone is unlikely to pass the test.
Claims based solely on a unique aesthetic on the front end, in terms of creating an improved user experience or a new user interface design, are not enough to qualify. Even if the platform features a new and improved business model, the claim may be rejected if the underlying technological advances aren’t also included.
While there is a small chance front end claims could be eligible, back end work is always far more likely to help see an application not get rejected – so make sure to include it!
Cloud computing and data costs
From 1st April 2023, HMRC allows costs relating to cloud computing or data in a R&D claim, so be sure to include them in any application. Other key qualifying criteria such as employee wages, costs of consumables, and software expenses should also be considered.
By Tom Adcock, Tax Partner at Gravita,