Record-keeping for R&D Claims

With recent changes to R&D tax incentives and the publication of new Guidelines for Compliance for R&D tax reliefs (GfC3), there is now more explicit guidance and emphasis on accurately documenting your R&D.

This article explains why you should have records to support your R&D claims, the type of records to keep, the impact of legislative changes, and practical tips on implementing non-onerous recording keeping processes in your business.

Why should you keep R&D records?

Records of time and money spent on R&D underpin any claim for R&D tax relief. If you are undertaking qualifying R&D activity and wish to make a claim, you should be prepared to explain to HMRC how you have identified those qualifying R&D projects, activities and costs, including which business records you have relied on.

R&D record-keeping will help you:

• Show a systematic approach to R&D activity.
• Demonstrate that your work sought to advance the overall level of scientific or technological capability in your field.
• Account for all qualifying expenditure.
• Back-up any apportionments you have applied to calculate qualifying R&D expenditure.

Improving the quality of your claim with better record-keeping

Recent years have seen an increased focus from HMRC on compliance, the emergency of case law dealing with evidence requirements for R&D claims, significant changes to R&D tax legislation, updated GfC guidelines for R&D and new filing requirements such as the Additional Information Form. Together, these changes have increased the importance of R&D record-keeping, and they provide essential guidance on what records HMRC (or a tribunal judge) may expect to review when checking the validity of an R&D claim.

The benefit of good record-keeping is a better quality claim. This often means one which has already undertaken effective risk management and would be ready to answer questions should HMRC decide to raise an enquiry. Good records also underpin your ability to capture all of your eligible activities and costs, often leading to more value as well.

GfC3 and record-keeping requirements

Published in October 2023, HMRC’s Guidelines for Compliance for R&D tax reliefs (GfC3), outline what is expected in support of an R&D claim. There are several key points covered in GfC3 on record-keeping that we’ll look at it in more detail:

Timing

HMRC’s emphasis when it comes to record-keeping is on planning ahead – they would like to see written documentation created at the time of the R&D project. Ideally you should be thinking about record-keeping when kicking off a project, not after the event. Contemporaneous records (covered in more detail later) are a valuable source of evidence to support an R&D claim. Although it may seem obvious, being able to evidence when records were created is important, particularly if you are responding to an HMRC query raised some time later.

Scope

HMRC’s record-keeping expectations cover the nature of the R&D – advances sought, uncertainty faced, approach to resolving uncertainty, as well as the expenditure and time spent on the R&D activities. Different records may be appropriate for the different relevant cost categories included in your claim, and the scope of record keeping expectations will depend in part of the amount of expenditure claimed in each category.

Baseline research

In an enquiry, HMRC usually ask for evidence of the research carried out by the company’s competent professional(s) on the available relevant technological knowledge and capability at the outset of the R&D project. When carrying out R&D, it is expected that the development team will first consider whether there are routine approaches or solutions available to resolve the challenges faced. However, in an agile development environment, this baseline research is not always well documented. Putting in place processes to document the analysis carried out can significantly reduce your risk profile in the event of an HMRC enquiry.

Testimony

The opinion of a competent professional is strong evidence in support of an R&D project. From the perspective of HMRC’s record-keeping guidance, writing this opinion down during the R&D project is ideal, as it creates a record of the judgment at the most appropriate point in the project. The more retrospective that opinion is, the more risk is introduced, as memories are fallible. This is particularly key as the most appropriate competent professional(s) to answer HMRC’s questions may leave the company after completing a project, limiting scope for their opinion to be sought in support of a later enquiry.

Types of records

In the GfC3, there is a list of the types of records HMRC may request:

• Project charts
• Drawings
• Designs
• Test results
• Photos of prototypes
• Minutes of meetings
• Email exchanges

Often there will be substantial amounts of this type of documentation attached to a project. Retrospectively reviewing all of it to decide what is most relevant can take a lot of time, so some sort of process to store relevant documents in a timely way can be valuable in dealing with HMRC requests for documents. This is why we recommend adding R&D to existing meeting agendas, as the minutes of these meetings can be easily stored, retrieved and reviewed at a later date.

Purpose

It’s important to remember that record-keeping isn’t just for HMRC requests during an enquiry. The primary purpose should be to facilitate the claim preparation, so in the first instance, the record-keeping processes you adopt should underpin your claim methodology.

As an example, records of monthly meetings may show the dates between which specific uncertainties were being worked on and by whom. These can then be used as evidence to support cost apportionments for calculating R&D expenditure. They can also be provided to HMRC as evidence to support those apportionments if needed.

Record-keeping and the Additional Information Form (AIF)

The introduction of the AIF for all R&D claims formalises the information you need to provide to HMRC. One of the requirements is a specified number of project descriptions. For example, if your R&D claim includes between four and 10 projects, you should provide details of at least 50% coverage of qualifying expenditure, with a minimum of three project descriptions.

In addition, HMRC needs to see a breakdown of qualifying costs for each project. With the need to identify qualifying expenditure accurately for each project and potentially prepare detailed narratives for more projects than previously required, there is an increased burden for some businesses. Good R&D record-keeping will make things so much easier.

What records do I need to keep for an R&D tax credit claim?

The records that you will need to keep for your R&D claim will depend on your business and the type of R&D you are conducting. HMRC has no prescriptive record-keeping requirements specifically for the purposes of claiming R&D tax relief, acknowledging that the records kept by individual companies will vary.

HMRC also doesn’t expect the record-keeping you implement to be onerous to the business or conflict with any wider business requirements. For example, they wouldn’t expect you to buy an off-the-shelf timekeeping system purely for recording your R&D expenditure.

Here are some typical areas that you should consider capturing:

What happens if I have no records?

HMRC accepts that first-time claimants are unlikely to have detailed contemporaneous records to support all their R&D work. However, with it now being a requirement to notify HMRC if you plan to make a claim R&D relief for accounting periods beginning on or after 1 April 2023, there are expectations around having some documentary evidence. Using the claim notification form, you need to provide various details including a high-level summary of planned R&D projects.

The nature of R&D work makes it likely to be carried out systematically, meaning HMRC generally expects some evidence of R&D work to be demonstrated in your company’s records: some form of planning material, for example.

If you have no specific records for your R&D tax credit claim, all is not lost. ForrestBrown will work with you to discuss the work undertaken and create a bespoke claim methodology. The difficulty in preparing a claim without records is the time-lapse since the activities took place.

Projects will usually have left their mark on your business, even if you did not formally keep records. In most cases, records can be pieced together to form the basis of your R&D claim.

You need to identify your qualifying R&D activities and your qualifying costs, and attribute these costs to your qualifying R&D. The phrases ‘appropriate proportion’ and ‘just and reasonable apportionment’ both appear within the R&D tax legislation. This wording means you need to consider how you will attribute costs to R&D activities.

Moving forward from a first claim, we strongly recommend real-time record-keeping for R&D processes. Jump for more information on contemporaneous records.

What is good record-keeping practice for R&D tax relief?

Timesheet systems are often perceived to be the preferred record-keeping system for R&D claims. But these may not always be the most appropriate method and without near perfect compliance from your team can often be inaccurate. The key is to implement an appropriate real-time approach to identifying R&D projects and costs – in whatever form best suits your business.

The definition of an R&D project is forward-looking as opposed to retrospective: R&D takes place when a project ‘seeks to achieve an advance’. So, once you know that you are carrying out R&D, you can implement reasonable record-keeping measures for future claims.

Fast-growth startups may have developed so quickly that systems which would enable record-keeping are not in place. Conversely, long-established family firms may be loathe to change ways of working which have served them well over many years. But whatever the size of your company, HMRC will expect to see evidence of R&D in the records available, so it is important to take a tailored approach.

Real-time record-keeping & contemporaneous records

HMRC encourages businesses to keep more contemporaneous records when recording R&D activity.

What are contemporaneous records?

Contemporaneous records are real-time documentary evidence of what was going on in your company – in this case for R&D purposes.

Why are they beneficial?

The strength of contemporaneous records for R&D claims is that they provide a reliable picture of what R&D activity and expenditure has occurred. They minimise estimation, particularly when looking back at work completed over the previous accounting period.

It strengthens your claim from HMRC’s perspective, makes the process of claiming considerably easier for you, and can increase the value of your claim, in comparison to claims where estimates are relied on.

A timesheet system is the preferred approach from HMRC, however an alternative solution may be a quarterly review of projects undertaken with notes kept about the nature of the work. Another solution could be reviewing staff involvement in R&D at senior management meetings.

Most businesses recognise the merits of monitoring time and resources spent on R&D but often meet resistance when it comes to embedding this into everyday working practices. With HMRC’s focus on compliance and increased capacity to launch enquiries, it is more important than ever to ensure R&D claims are supported by robust evidence.

Challenges of keeping contemporaneous R&D records

Increased prevalence of hybrid working and collaboration between teams in separate locations makes it more challenging than ever to keep accurate records if the right processes aren’t in place.

Making R&D record-keeping part of your company culture

With record-keeping we advocate a ‘little and often’ approach:

• Don’t get to the end of the year then try to recall how much time has been spent on R&D. Instead, record it daily, weekly and monthly.
• Incorporate record-keeping into the company’s existing processes rather than creating new and complex processes that are likely to be met with resistance and rejection by staff.
• Add an agenda point on R&D to regular team meetings and make it easy for teams to report their contributions by sharing access to key documents and folders.
• Consider the capabilities of existing accounting systems, time tracking tools and other software solutions.

Small steps like these will be easier to sustain and will avoid R&D record-keeping becoming burdensome for busy technical teams. At ForrestBrown, we work closely with our clients to help them develop an ‘always on’ approach to R&D record-keeping. We can also provide training and quarterly catch-up meetings to our clients to better equip teams to identify R&D and log specific technological advances and uncertainties arising. Our aim is to help you capture a full picture of your R&D activity rather than the partial snapshot previously generated by a retrospective annual review.

R&D record-keeping for large and complex companies

At first glance, large companies might appear to be ahead of the game when it comes to record-keeping. More sophisticated HR systems are likely to come with the capability to track R&D activity across multiple teams. But with a more complex structure comes another challenge – getting buy-in for the R&D claim in the first place.

To help overcome this hurdle for clients, ForrestBrown can produce informative and engaging internal communications material for project leads to share with stakeholders within the organisation, as well as provide comprehensive training sessions. This helps them understand what qualifies as R&D and the potential benefits to the business. Building understanding and support will increase the likelihood that internal stakeholders will commit to your record-keeping requirements.

How to record research and development costs

Having looked at the types of activity we advise you to record, now let’s look at how to record them.

Identifying and recording how much R&D 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.

R&D timesheets

Because staff time tends to form such a central part of an R&D tax credit claim, accurate records are essential. Some form of contemporaneous time-keeping system is the best way of recording staff time apportioned to R&D. And timesheets are an obvious answer.

Timesheets are good at determining the appropriate proportion of staff time attributable to R&D. A timesheet system for logging staff time on projects is a strong foundation for preparing an R&D tax relief claim. It also creates a list of commercial projects undertaken, which is helpful in itself. But more than that, it chalks up time to each project, giving you an accurate view of time apportionment for each staff member.

One of the strengths of timesheets is that they are contemporaneous records of how time is spent. They will probably be as close as you can get to real-time record-keeping, being completed on a daily or weekly basis. In our experience, the closer you can get to a real-time approach, the bigger your claims are likely to be.

Whilst timesheets are extremely useful, they should not be seen as a complete solution for R&D record-keeping, for the following reasons:

• As they are unlikely to be solely used for R&D, there will not be a perfect alignment between what they record and your R&D projects – so a degree of judgement will still need to be applied.
• You need to consider whether they are accurate before you rely on them for an R&D claim. Who in your business is responsible for them? Who fills them out? Do they properly understand the definition of R&D? What is the main reason they are kept? Does everyone maintain their timesheets correctly?
• Timesheets will not help you analyse the costs of external workers like subcontractors, materials expenditure, or in defining R&D activities themselves.

ForrestBrown can help you modify existing record-keeping systems like timesheets to ensure they are suitable for use in an R&D tax credit claim. This will help you keep good quality records with the least amount of effort and ultimately improve the quality and size of your R&D tax credit claims.

Record-keeping best practices and tips

We have put together six practical tips that will help you in your R&D record-keeping:

1. Think how you can adapt existing processes to better record information. You probably won’t have to reinvent the wheel when implementing R&D record-keeping procedures. You will be sure to have some processes in place that will be of use.
2. Schedule kick-off meetings for projects and R&D projects. These may include many of the relevant discussions for allocating resources to R&D, discussing the technological uncertainties and risks, and setting out your goals. Minuting such meetings is an excellent form of record-keeping. This will also help the business create a project plan which is strong evidence for HMRC.
3. Accuracy leads to more robust claims and ensures you get rewarded for your innovation. The more confident that you can be in the information underpinning the claim, the bolder you can be in increasing its value. Ideally, before you start your R&D projects (but if it’s too late for that there will be value for future claims) review where you will be relying on estimation. Then work out how you can put a proper record-keeping process in place so that you can present hard facts as part of your claim.
4. Embrace record-keeping. We find that among the companies we advise, the ones who plan and strategise around record-keeping for R&D embed this approach over time. This means that they put innovation at the heart of their business. They realise that with R&D tax credits, they can take on more risky projects and ultimately do better work which drives the overall growth of the company.
5. Ensuring your records are accessible. It is important to ensure your records are accessible – kept in a secure, structured fashion. This will be important both during the preparation of the claim, but also afterwards in case HMRC wants to audit any of the information.
6. Even records of activity that doesn’t qualify for R&D tax credits can be useful. Some activities are specifically excluded from R&D tax credits, even though they may be innovative. But records documenting such activities still have the potential to be used in an R&D tax credit claim. One such example is patent applications. The costs of putting together and registering a patent do not count as R&D – rather they are for protecting completed R&D. However, the records are useful because they provide strong evidence that qualifying R&D took place. Always think about wider records you keep and how they could feed into an R&D tax credit claim.

Avoiding common R&D tax record-keeping mistakes

Companies looking to up their R&D record-keeping game should avoid these common pitfalls:

• Timesheets are a useful tool – but only if technical teams buy into the purpose behind their introduction. Make clear that recording time accurately will play a part in securing funding for future investment in R&D.
• Include everyone in record-keeping. Don’t make the mistake of excluding senior people such as the company founder, CEO or Chief Innovation Officer (CIO). If they are contributing to innovation, then it is important to keep a record of their time.
• Don’t be restricted by project boundaries when recording time. All activities that collectively resolve scientific or technological uncertainty constitute R&D – and these could be happening elsewhere in the business beyond the immediate parameters of your project.
• On the flipside, not all your project hours will constitute R&D. Be realistic about what aspects of the project you record. For example, not all elements of building a software platform will be eligible. All software development involves creating new code. But only some new code is R&D. Always remember the two key requirements for R&D – seeking an advance in science or technology through resolving technological uncertainty.
• Finally, projects may continue well beyond the R&D stage but retain the same project code. So, make sure you recognise this in your record-keeping.

How ForrestBrown can help

ForrestBrown offers comprehensive support to companies who need to develop robust record-keeping processes. Our team is more than 80+ strong and made up of chartered tax advisers, lawyers, PhDs, sector experts and former HMRC inspectors. This adds up a level of technical firepower that is hard to match.

The ForrestBrown team has considerable specialist expertise in advising on developing strong record-keeping practices. Mark Andrew is a former-HMRC tax inspector. This gives our team a unique insight into the way in which HMRC works and is thinking about R&D tax credit claims. By having this resource available to our clients, we can advise on best practices and processes that fit with your business.

When we manage the R&D tax credit claims process on behalf of a client, we will assist them in identifying what records they currently have. And we will provide bespoke suggestions to improve their record-keeping for future claims. Things like looking for R&D as an agenda item in monthly meetings, checking out Slack groups and any blogs created around technical processes.

We also offer expert, standalone record-keeping consultancy. It is designed to help you reduce risk and ensure you are adhering to the best standards. We can work alongside your existing tax team or advisers.