Successful research and development (R&D) tax relief claims rely on your ability to provide evidence of associated costs, making financial record keeping of the utmost importance. Indeed, comprehensive financial records can go a long way towards maximising the value of any given claim.
With that in mind, today, we’re offering up a guide to R&D financial record keeping, detailing the admin HMRC expects to see to ensure your future R&D claims are successful.
What records should you be keeping?
The R&D tax relief incentive is a government-funded scheme that looks to subsidise the associated costs of any qualifying research and development project. As such, HMRC expects to see empirical evidence of the associated costs of any given R&D project.
The definitions of eligible associated costs are laid out in full by the Department for BIS (Business, Innovation and Skills), but, as a rule of thumb, the primary cost categories are:
- Staff - the members of your workforce on your payroll
- EPWs - externally provided workers from a third-party staff provider such as staffing agencies and personal service companies, or a hired freelancer
- Subcontracts - outsourcing of qualifying R&D projects could be eligible for up to 65% of relief under an SME R&D tax credit claim
- Consumables - materials consumed or transformed in the pursuit of overcoming scientific uncertainty
It’s important to note the use of ‘appropriate proportion’ and ‘just and reasonable apportionment’ in the HMRC’s eligibility guidelines. While these terms lack any objective definition, they do stress the importance of proving how any costs claimed had an impact on qualifying research and development activity.
The HMRC’s Corporate Intangibles Research and Development Manual offers up some useful guidance on their general R&D review process, and details no specific rules around the maintenance of financial records. That’s because, in theory, formal record keeping isn’t a requirement of eligible R&D claims. It just makes life that much easier for everyone involved!
From maximising the value of your claim and ensuring no cost is left unaccounted for to HMRC’s ability to easily cross-reference and approve your claim, the many benefits of proper record keeping will see you optimise your business’s R&D process for the better.
The best approach to financial record keeping
The most effective means of financial record keeping, of course, depends on your business’s operations and processes, and the type of project you’ve undertaken. That being said, we’re yet to find a more optimal approach than real-time record keeping.
Real-time financial record keeping - for the purposes of R&D tax relief claims - boasts a whole host of advantages, strengthening the accuracy (and often the value) of your claim by not relying on estimates and making the claims process considerably smoother for both the applicant and the reviewer.
Again, the best approach to real-time financial record keeping depends on the most effective way it can be integrated into your business’s existing processes and operations. Where possible, cross-referencing your financial records with a comprehensive timesheet is often the best approach, but we understand this isn’t always the most commercially viable option for businesses.
In these instances, we recommend regular reviews of projects to ensure you’re keeping on top of tracking any expenditure that could later be reclaimed.
Regardless of how thorough your financial record keeping has been to date, Lumo can help you ensure your R&D tax relief claim is a success. Get in touch today to find out more.