For research and development (R&D) tax credit applications, though, the ‘narrative’ can be just as important as the raw ‘numbers’. Being able to eloquently justify why a particular activity counts as research and development can mean the difference between a sizeable cash injection from HMRC and a failed R&D tax credit application.
Telling this narrative is more like a specific, technical skill rather than an art, despite its name. Creativity or inventiveness is not the point – the R&D tax specialists’s narrative is a functional and scrupulously truthful but convincing and compelling piece of writing.
However, the technical narrative is also not a dry text that simply follows a certain set of rules to arrive at a pre-set outcome. In other words, writing an R&D technical narrative is a skill that combines technological savvy with intuition and hard-won understanding.
Unique Skills For A Unique Role
Because R&D tax consulting is such a niche area within taxation, it requires great depth of understanding and experience. On the other hand, because “research and development” is such a broad term, and the cut-off point between what the average person considers R&D and what HMRC considers R&D is so unclear to the layperson, it requires huge breadth of understanding and experience as well.
To create a convincing technical R&D narrative, therefore, an accountant needs to have spent time and effort becoming a research and development tax credit specialist. It’s the unique combination of breadth and depth of understanding which makes R&D tax a much harder subject to broach for a general practice accountant – who will typically not have the time to invest in becoming an R&D tax expert.
Counting The Cost Of A Bad Narrative
Our numbers and narrative both come from our initial R&D analysis, combined with personal meetings that help us understand the situation more completely. While the numbers are very important, the ability to construct a narrative that tells HMRC what they need to hear is often the limiting factor for more general accountants.
Firstly, if an accountant doesn’t realise that an area will qualify for research and development tax credits, they won’t even consider adding it to the numbers. We frequently see R&D claims prepared by other parties where significant items of expenditure have been omitted.
Secondly, if an accountant does realise that an area will qualify, but doesn’t take care to highlight the most important aspects of that area in the narrative, which make it R&D according to HMRC guidelines, it is possible that the R&D claim will be reviewed by HMRC and either reduced or rejected.
Finally, if the narrative is erroneous or misleading, a claimant could find themselves in trouble. HMRC enquiries, discovery assessments and investigations can be the result of improperly filed claims – This is obviously a worst case scenario.
Of course, if you find yourself short-changed on tax credits you can always re-file a submission, but a well-crafted re-filing is less likely to succeed than a well-crafted original claim as they receive more scrutiny and attention from HMRC. We often see previously submitted claims where valid expenditure has either not been claimed, or the narrative makes clear that the claimant has not fully understood what expenditure qualifies for relief.
Being able to put a large amount of work into both the calculations and the narrative work makes our specialist R&D tax credit work much more effective.
Rebalancing Numbers And Narrative
Understandably, HMRC can be extremely picky when it comes to classifying ‘qualifying’ R&D. You can easily ‘disqualify’ yourself while writing the narrative, or simply miss out on opportunities that it’s hard to get back later.
Most accountants are fully able to perform the calculations, once they’ve been given a workable narrative; however, creating an effective narrative is undoubtedly the hard part.
Being able to tell your story well is an important part of the R&D specialist accountant’s skillset. If you do want to tell HMRC about your research and development work, come to us for help with presenting your work properly and most importantly successfully.