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Reduce an audit risk with an R&D Tax Credit Claim

Claiming R&D tax credits is a huge financial boon for any business. With more time allowance and resources to level up their business, SMEs benefit most. However, the process of claiming R&D tax credit carries with it the risk of an audit by HMRC.

Although R&D tax credits are still underutilised by companies, the number of applications has been steadily rising since they were introduced in 2000. The number of claims made in the 2017/18 tax year were 31% higher than the previous one, for example. This has increased the level of scrutiny from HMRC in its claims review process. 

The outcome of an HMRC audit can cause significant damage to a business, in terms of the time it takes to conduct as well as the possible monetary penalties. This is an eventuality your client will want to avoid at all costs. That’s why we’re here to tell you how.

The risks of an HMRC audit

Most of the time HMRC conducts an audit when a company’s application contains suspicious information and/or data that doesn’t add up. It could be that HMRC wants more information on specific areas of the application. Other possible factors include your client’s tax position and their relevant industry sector/field.    

More often than not HMRC conducts investigations before any money changes hands. Although this does not mean the risk associated with an HMRC audit is diminished. It can take anywhere from a few months to a few years for an inquiry to reach its conclusion. During this time, your client will be diverting people, time, and resources to solving the problem. This is a massive drain on the business’s operating potential, not to mention a big logistical headache. A poorly handled investigation can also put your client in bad stead with HMRC, compromising future interactions on tax matters.

If an inquiry is launched after a tax credit payout, it can result in dire financial consequences. Your client might be forced to repay the money received as part of the tax credit, plus up to 100% of the total qualifying expenditure they outlined in their claim. HMRC can also enforce an interest charge on the repayment of any money spent.

Ways to reduce audit risk

As discussed in our previous blog, Six easy steps to claim HMRC R&D tax credit, there are a few steps in applying for R&D tax credits. As a result, there are many opportunities to reduce your client’s risk of an HMRC audit.

  • Recognise what qualifies as R&D

The Department for Business, Energy and Industrial Strategy (BEIS) provides guidance on the work that qualifies as R&D. They say, “when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D”.

Your client should keep this wording in mind and consider how the innovations they’ve made contribute to their field. The start and end of qualifying projects should be included to ensure all bases are covered. This will be important when writing the technical narrative of your client’s application.

Your audit risk is enhanced if your client lists costs that don’t contribute towards R&D projects because HMRC will reject the claim and launch an investigation. We discuss qualifying R&D expenditures here.

  • Use best practices when collecting R&D data

You should present your client’s R&D project data clearly and in depth. This becomes complicated when calculating the percentage of different expenditures that are claimable. For example, some employees might have split their time between R&D and non-R&D projects.

Some of the best practices involve tracking relevant R&D data at various points throughout research projects.

    • Assign an R&D manager: someone within each project whose job it is to track R&D activities as they are undertaken. This is a role best allocated to a person in a managerial position.
    • Source code comments: in qualifying software development projects, comments can be implanted in the code to record the development process. This helps the claims processor visualise the link between the work and what is being claimed.
    • Create a dedicated R&D email: create an email address used by you and your staff with regards to all matters concerning R&D costs and projects. When it comes to preparing your client’s application, this will be a huge time-saver and help ensure nothing is missed.
  • Double-check your numbers

An easy way for HMRC to justify an audit is if numbers in an R&D tax credit claim application don’t add up. Therefore, recording and laying out your client’s financial data accurately is a must to avoid an audit!

  • Review using technical staff

The staff allocated to your client’s R&D projects are the ones who know the most about the qualifying work that is being done. As such, they are the best people to use to document and review the relevant sections of the application process. Their technical knowledge can be used to catch corner cases that may affect the claim’s eligibility.

A final point: sometimes HMRC will randomly audit companies that apply for R&D tax credits, so don’t panic if you’re facing an investigation.

Put your client’s mind at ease by using made.simplr

The risk of an HMRC audit should not discourage your client from pursuing an R&D tax credit claim. made.simplr offers state-of-the-art R&D tax credit software that makes inputting your client’s data quick and easy. By connecting with the Xero platform your client’s company information is fully integrated with their claim. This allows us to guarantee the accuracy and security of any R&D tax credit claim.

By working with us your client will also get access to a team of R&D tax credit experts eager to provide for their business. Many of our specialists have themselves previously worked for HMRC as claims reviewers to boot. They are on hand at every stage of the application process to remove any trace of audit risk for your client.

Book a demo today.

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