Record Keeping For R&D Tax Relief
In light of heightened vigilance from HMRC regarding claim assessment, there has been an increased focus on contemporary evidence. HMRC is seeking some backup for the work that was conducted in a given accounting period to substantiate a company’s efforts and confirm the work described in the report has taken place within a relevant accounting period and the correct amount of costs has been claimed.
What records are HMRC looking for?
There are four types of records that HMRC would like the claimant to maintain throughout the year – namely, legal, financial, technical and time logs.
Legal documentation can help to identify the scope of activities contracted and how various entities are connected and could determine whether you are eligible to claim under the SME scheme or RDEC. For instance, if you hired any subcontractors in a given accounting period, there might be some contractual agreements that were signed and spanned a relevant fiscal period.
This document can be useful to evaluate whether the subcontracted work involved resolving uncertainty or not, who owns the IP to the final design or product, or who carried the financial risk when it came to resolving the uncertainty.
Maintaining track of financial documentation according to GAAP would be sufficient. The documentation that would help substantiate the claim would include financial statements and proof of payments. Financial statements are required to accurately compile costs. Proof of payment, on the other hand, is requested to validate which fiscal period the costs relate to.
When conducting the work on your project, it is a good practice to keep relevant documentation that could showcase the problem or the objective of the project, work performed and any tests that could indicate the advancement. Types of evidence can range from emails or messages to design drawings, photographs, physical prototypes, test results etc.
Note: It is important to keep records of any failed attempts to present the whole picture of the work carried out.
Keeping track of time dedicated to various activities is very important, as it enables both consultants and later on HMRC, to differentiate between qualifying and non-qualifying activities for R&D Tax Relief. The more detailed the breakdown of activities and the time allocated to them, the more robust the evidence.
If you would like to discuss your current record-keeping strategies or if your work is eligible for R&D Tax Relief, do not hesitate to contact us!
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