What to do if your R&D application is rejected
The UK government believes that technological innovation is created by combining human capital, existing knowledge and ground-breaking ideas. Does this sound like what your business is doing? With the R&D scheme, UK businesses can be eligible for a Corporation Tax refund or reduction.
In a nutshell, you will only be considered eligible if your project has developed a new process, service or product - or improved on an already existing one. And the benefits are great: R&D tax credit are currently up to 33p for every £1 of qualifying expenditure.
However, far from all claims are deemed successful. In this article, our R&D specialist will take you through what happens if HMRC rejects your application.
Acceptance or rejection?
By now, your company has spent valuable resources on making discoveries that can positively impact your industry. The results are clear, and your team is certain that the recent activities fit the requirements of the R&D umbrella. Filled with optimism and excitement, you file your claim.
But rather than receiving the acceptance you were hoping for, you find a generic HMRC letter stating that: “The BIS Guidelines refer to an advance in science or technology as an advance in overall knowledge or capability in a field of science or technology (...) It is important to note that a process, material, device, product, service or source of knowledge does not become an advance in science or technology, simply because science or technology is used in its creation.”
What does this actually mean? Did your claim get rejected? And how will this impact any future R&D tax credit you might want to file?
The next steps
Firstly, it’s important to note that the above letter is not a rejection.
In fact, it’s simply the general response issued by HMRC when it makes an enquiry into any tax relief claim. After receiving your R&D claim, HMRC generally do one of three things: (1) Accept your claim, (2) reject your claim, or (3) request more information.
It’s very common for businesses to receive requests for further documentation. The purpose of this request is to further investigate the technological advancements that has occurred. This is either because you didn’t provide the correct information in your original claim, or because HMRC is questioning whether or not you comply with the R&D criteria.
Most importantly, it’s not a rejection - yet. As you’re most likely receiving this request due to a lack of proper documentation in your first claim, your next step should be to compile additional documentation that clearly proves how your project differs from what is considered standard practice.
Additional documentation is absolutely imperative when convincing HMRC that innovation has occurred, and there’s especially three factors that need to be outlined clearly. The first factor is to show that you looked for an advance in your field. This means that an advance cannot be an already existing technology that has been used in your sector for the first time, it needs to be innovative and potentially bring a change for others in your industry.
Secondly, you must be able to prove that there was an uncertainty regarding the outcome of your project. This means that experts in your field can’t already know about your advance, as it must be something that wasn’t known to be scientifically or technologically feasible until your team created a solution.
Finally, you need to show HMRC how you tried to overcome that initial uncertainty. Your documentation needs to clearly state the process that led to your solution, so make sure you include a detailed report. It’s also important to remember that success comes in many forms and shapes, so whether you completely disrupted your field with new technology, or if you simply provided a solution to a well-known problem, you need to show a detailed plan of your progress.
After receiving your additional documentation, HMRC will liaise and consult with their own in-house IT teams to assess your claim. In some cases, HMRC will also bring in an external technical expert to consider the merits of your project.
Get external help
To summarise, HMRC will request supporting documentation if they suspect that an organisation is non-compliant in their claims. Any business making R&D tax claims should be prepared to receive queries like this - and to respond in the most precise way possible.
If you find the process confusing, we can highly recommend that you get in touch with R&D advisors or specialists, as they can provide you with useful insight into what others have done in order to file a successful claim. Our R&D experts here at Software Advisory Service will always be at hand to aid you through your R&D tax relief process.
How SAS can help with your R&D application
Whether you are looking to make a claim, or have had a claim rejected, get in touch with our R&D advisers for expert advice.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.