There are a number of ways of identifying how much research and development (R&D) work each staff member does. The way an employee’s time is allocated will depend on the nature of the R&D work you have undertaken and what records you have on how staff time was spent on these activities.
We often find that companies do not know that they are eligible to make a claim for R&D tax credits until after the end of their accounting period. In these circumstances, you may not have kept detailed records of the time spent on R&D activities by each staff member.
The type of records kept – and how detailed they are – will differ from company to company. For this reason, you will need to consider what records you have available and whether these are sufficient to support an R&D tax credit claim.
What records are appropriate to support staff time?
Some form of contemporaneous time-keeping system is the best way of recording staff time apportioned to R&D, however this does not mean that a formal timesheet system is always necessary.
Where you have limited records – or none at all – to support time spent on R&D activity, a degree of estimation will likely be required when you are apportioning staff-time. HMRC is pragmatic in these circumstances, especially for first-time claimants who mightn’t have had record-keeping measures in place at the outset of their R&D projects.
Any estimated apportionments should be supported with evidence and a robust apportionment methodology. For example: you may not have timesheets to support your apportionments, but you might be able to identify the start and end dates of your R&D projects from your internal records. These might also include who was involved and what their role in the project was. Using these records as the basis, a reasonable apportionment can be calculated.
If your records cover commercial projects, you should carefully consider the boundaries of your R&D project within this commercial context. Your R&D project’s boundaries will often be narrower than the overall project – as your R&D will just be one part of the project’s deliverable(s). To ensure your projects are properly claimed for, you need to identify when your R&D work starts and stops. Your R&D activities are those which collectively seek to resolve scientific or technological uncertainty. These are distinct from activities which occur within the project, but do not contribute to the resolution of technological uncertainty.
Common examples of project activities which would not typically be included within an R&D project include: market research, legal and marketing activities, raising finance, as well as aesthetic or cosmetic design work.
Starting record-keeping procedures
Once you’re aware that you are undertaking R&D and want to potentially claim R&D tax credits, you should start thinking about record-keeping. It is good practice to consider whether you can implement a non-onerous record-keeping process to reduce your reliance on estimates in your R&D tax credit claim. What is appropriate and realistic will depend on the individual circumstances of your business.
HMRC’s guidance states that there are no specific record-keeping requirements for R&D tax credit claim purposes. However, you have a responsibility for the accuracy of the figures you include in your Corporation Tax return. As well as satisfying HMRC, companies usually find that keeping contemporaneous R&D records reduces their overall time commitment during a claim. It can also often lead to more qualifying activities, and therefore greater expenditure, being identified. Better records will make for more robust, bigger claims.
Better record-keeping with ForrestBrown
The record-keeping support and advice we offer at ForrestBrown is included as part of our service – it’s part of an ongoing relationship we enjoy building with every client.