For any R&D claim, the claimant must keep records in order to be able to substantiate it. This has been the subject of numerous Tax Cases & Tribunals which HMRC has won over the years. There’s even been a First Tier Tribunal in Teksolutions Inc v HMRC.
Essentially, no records of expenditure could equal no valid claim
As a starting point, HMRC’s ‘Corporate Intangibles R&D Manual’ (CIRD) is always a reliable place to start. There is a lot of information at CIRD80525-80570. CIRD80570 describes what HMRC would expect from R&D claims.
There are formal record-keeping requirements for all claims for tax relief. There is nothing specifically for the purposes of claiming R&D relief. In any case, the general Corporation Tax Self-Assessment requirement to maintain sufficient records applies.
This should not pose problems for R&D claimants, since invoices, etc., need to be kept for CTSA purposes in general. A professional accountant will advise a newly incorporated company on what HMRC requires.
Anecdotally, HMRC seems to be a bit more lenient on claims in the first couple of years. Certain parts of the CIRD guidance almost invite potential claimants & their agents to ask what they should look for in a compliant claim.
HMRC has historically been tasked with encouraging the take-up of the R&D scheme, as well as policing it. In recent years, it may seem that has changed! They would certainly expect detailed records moving forward from year 3 onwards.
HMRC loves accurate records-particularly timely ones.
Potential problem areas arise where R&D claimants are:
With claiming for staff time, for instance, you can have five software engineers working on a project, each earning £50k, but each with a different area of expertise. As a claimant, you know you have spent £250k OVERALL on staff, but you don’t keep timesheets.
As part of HMRC’s suggestions for R&D record-keeping, timesheets are mentioned. However, timesheets are rarely completed in a timely manner, and/or each employee must understand what qualifies as R&D.
Would they be filled out in a timely (or contemporaneous manner) way? Would each member of staff completing a timesheet understand what constituted an R&D activity? That would need a lot of education from the claimant company.
The solution to this could be to include R&D as an agenda item at your monthly Director/SMT meetings and record the conclusion. This will make it much easier for you to remember & record what has happened regarding R&D costs in the last few weeks.
A very significant point, even more, significant than documenting expenditure, is for the Competent Professional at the company to note that R&D qualifying activities are discussed and recorded as part of senior management team meetings.
In conjunction with the BEIS Guidelines (CIRD81900), this protects you from one of the favourite HMRC questions, “When does R&D start and end? How much/is there any R&D?”.
HMRC acknowledges there isn’t a ‘one size fits all method of record keeping & suggests some flexibility. Anecdotally, they don’t expect R&D record keeping to be too bureaucratic, but timely record keeping should be viewed as of paramount importance to the robustness of future claims. Particularly as this has been signposted as an area of increasing importance by recent HMRC statements of intent regarding the scheme’s reform.