When submitting an R&D Tax Credit claim, HMRC needs evidence that your R&D expenditure is legitimate. The best way to make sure you have this evidence is through efficient record-keeping.
The more evidence you have, the more you’ll be able to claim back compared to a company who hasn’t recorded – and likely doesn’t remember – all of their R&D expenditure.
In light of increased HMRC enquiries, having evidence of your R&D is a sure-fire way to dispel any doubts about your claim’s legitimacy.
No two businesses are the same – even HMRC recognises that – so there aren’t any set-in-stone requirements for record-keeping. This is handy, but might leave you wondering where to begin.
To help you out, we’ve compiled our top tips and tricks for efficient record-keeping that are guaranteed to ensure you maximise your R&D claim.
What do HMRC want to see?
When keeping records, it’s useful to think about what HMRC actually want to see.
Firstly, consider what can be claimed as R&D. Here are the areas of qualifying expenditure:
Payments to the subjects of clinical trials; and more recently:
Cloud computing and data
In order to maximise your R&D claim, your records need to cover all of these qualifying areas.
This means keeping records on:
Your R&D projects
Staff time dedicated to these R&D projects
The time/work of subcontractors
The cost of consumables
So, let’s take a look at the best ways to record this information.
Keeping a record of the R&D projects your business undertook is crucial for maximising your R&D Tax Credit claim, and project logs are one of the best ways to track this.
They detail what projects you worked on, who was involved, and what progress you made – tracking in detail what stages your project reached over the course of the year.
There are many things you can include in a project log: your initial plans and project goals, meeting minutes, regular progress reviews, and final project evaluations. These records give your claim greater legitimacy.
When making a project log, you should keep a record of all R&D projects regardless of whether they were successful of not (you can still claim on unsuccessful projects!).
Recording this information is vital – especially when it comes to writing your R&D Technical Report.
Timesheets are largely considered to be the best form of record-keeping. They record all employee time spent on particular jobs, and can therefore be used to prove time spent on R&D.
For R&D record-keeping, they’re great! They offer quantifiable evidence of exactly what, and how much, R&D took place.
As useful as they are, however, they shouldn’t be your only form of record-keeping.
This is because:
They don’t track costs and expenditure – they cover employee time, so you can estimate that cost, but not much else. They also won’t record the work of any subcontractors or EPWs, so that has to be recorded elsewhere.
Timesheets aren’t solely dedicated to R&D – Not every second of a working day will be dedicated to R&D – even an engineer will need to do admin at some point. This means that best judgement will have to be used when estimating how much time was spent on R&D.
Despite it’s limitations, timesheets are still solid evidence of R&D expenditure, and are generally the most accepted and standard form of record-keeping.
If you’re looking to maximise your R&D Tax Credit claim, keep your timesheets accurate and easily accessible!
It’s pretty obvious that in order to claim R&D Tax Credits, you need to keep track of your qualifying R&D expenditure – such as staffing costs and the cost of consumables.
Making a note of all your R&D related costs is the best way to maximise your claim and ensure no expenditure is missed.
Our top tip for tracking qualifying expenditure: nominal codes!
If you create a nominal code in your chart of accounts that’s specifically for research and development, when the time comes to produce your annual R&D expenditure, it’s easy to locate and show to HMRC.
Another area of cost that needs to be tracked is the cost of EPWs and subcontractors. The best way to keep track of what R&D external workers undertake is to ask them to provide a description of the work completed in their invoices.
If their work is related to R&D, then you can use this as evidence of qualifying R&D expenditure!
Making a habit of efficient record-keeping
Whilst businesses might be able to get away with subpar record-keeping for their first claim or two, HMRC will eventually need to see a detailed record of your R&D expenditure to back up your R&D Tax Credit claim.
Ideally, the information required will be recorded contemporaneously, ensuring that nothing is missed or forgotten at the end of a project.
If recording R&D processes isn’t already standard practice for your business, this might be difficult at first. Here are some tips to help you incorporate it into your day-to-day processes.
Start weekly meetings with an R&D debrief - the minutes from these meetings can be used as R&D evidence.
Before starting an R&D project, implement a record-keeping strategy - If a plan to keep records is there at the start, it’s easier to make it a routine practice.
Remind staff of the importance of R&D Tax Credits – The money you reclaim can be reinvested into your projects. If they remember the importance of it, they’ll remember to record!
Like we said, there’s really no set structure for record-keeping because HMRC recognises that different businesses have different capabilities and models.
But with these tips, you should get an idea of things to keep record of throughout the year in preparation for an R&D claim.
If you’ve got everything HMRC needs, you’ll be able to claim back more R&D Tax Credits than those who don’t.
If you’re looking to submit an R&D Tax Credit claim but haven’t kept records as well as you should have, don’t worry!
Experienced R&D Tax Advisors, such as the team at Claim Capital, will extrapolate data from any existing records you have – e.g. meeting minutes, employee reviews, payroll, and expenditure.
They’ll produce technical and financial reports on your yearly R&D in great detail, but having as much evidence as possible to back up the report will ensure a maximised R&D claim.
If you haven’t yet started efficiently keeping records, there’s no better time to start than now!