If HMRC decide to check your R&D claim, they will first write to you informing you they are opening an enquiry and they will also ask for some more information.

After sending in your response addressing all of the points raised, you might then feel a bit disheartened when HMRC write to you again asking even more questions, some of which you have already answered.  However, this is actually a really positive sign as it means your R&D claim hasn’t been rejected yet.

For those readers who aren’t aware, this method of dealing with enquiries by HMRC is fairly new and whilst it has some positives, it also has some drawbacks, especially for those who prepare their own R&D claims.  One of the main procedural changes is the move away from a named HMRC Inspector dealing with the enquiry.  In the case of self-prepared R&D claims, inspectors understood that the person they were speaking to was not a tax professional, so they worked with them to ensure that the correct outcome was achieved.

More recently however, HMRC have moved to a ‘volume approach’ where a standard 1^st letter is issued and then a 2nd letter, either dismissing the claim outright, or asking a series of generic questions.

So, what additional information do HMRC ask for in their 2nd letter?

Some of it might be specific based on the response to the first letter but they will also ask a set of generic questions, regardless of whether these were already answered in the first response.

Below are a list of the generic questions and example answers based on an R&D project undertaken by an engineering firm attempting to increase the power from a 1.6 litre engine from the 400bhp they knew was possible using current knowledge/technology to 450bhp.

For each project your company claimed R&D tax relief for, please provide:

• What is the existing product you are measuring each project against?

For this section, HMRC are asking if there is an existing product which you are looking to improve, or what did you know was technically possible at the start of the project.

Example answer: We are measuring this project against the existing maximum power achievable from a 1.6 litre engine using readily deducible methods and technology to increase power, which at the start of the project was 400bhp.

• What was the gap in technological knowledge or capability which necessitated the commencement of the R&D?

Now we have defined the project’s starting point in the previous question, we need to detail the gap between that and what we were trying to achieve.

Example answer: The gap in technological knowledge and/or capability was that we knew by using existing technology and readily deducible methods we could increase the power of the engine to 400bhp, however no technology or information in the public domain existed which we could use, or adapt to reach our project goal of 450bhp.

• What was the state of your platform before the R&D commenced, after the R&D activities completion and how does this compare to the rest of the market?

This question is to ensure that the advance you were seeking wasn’t just to bring your company in line with others in your sector, but that it represents an advance across the entire market.

Example answer: The state of our platform prior to the R&D commencing was that we had technology which could increase the maximum engine power to 400bhp, which was comparable to the rest of our market.

After our R&D project was successful ,we have now started to sell our technology, and at the time of writing no one else in our market has technology which can increase a 1.6 litre engine’s power to 450bhp.

• Describe the advance or appreciable improvement in the overall field of technology sought or achieved, and its impact on the field as a whole

For this section you should provide HMRC with details of the advance in technology you were trying to create.

Avoid talking about how it will help advance your company only, or how it will advance your industry if you don’t work in the same field of science/technology that the advance was being created in.

Example answer: The advance we were seeking was with regards to engineering, more specifically automotive engineering, and we were attempting to increase the maximum power achievable from 1.6 litre engines, from 400bhp to 450bhp.

If we could achieve this then it would represent an advance in automotive engineering and would mean that small volume car manufacturers could stop using larger engines for their vehicles, as our new technology would offer the same performance as commonly used 2.5 litre engines, resulting in lower build costs and also lower engine emissions for their vehicles.

• All stages from planning to deployment

For this section it’s best to provide a project timeline, including dates, for each of the various activities you undertook under the sections Pre R&D, Qualifying R&D and Post R&D. An example can be found in our previous blog.

• Individuals’ involvement at each stage

This section should relate to the staff/subcontractor costs you are claiming for and provide details of who was involved with the project and what activities they undertook.

Example answer: Our main engineer, Bob Smith, was involved with all stages of this project and we also engaged a specialist engineering company, ABC Engineering Limited, to assist with the design and development of the various prototype parts required during the R&D stages of the project.

You could also combine the previous section and this one, so on your project timeline include the name of the people/companies involved with each activity.

• Contemporaneous project documents that informed and support the R&D relief claim

If you have any project documentation which would help support your claim this should be provided, especially any documents which are dated as this helps HMRC establish that the R&D activities took place during the correct accounting period.

• Please send a more detailed explanation of why there was no ‘information that was readily available in the public domain, nor is it readily deducible by a competent professional.’

For this section, you should provide information about the research you undertook in an attempt to find a way to reach your project goals without R&D being required and why the known methods of development were not suitable for this project.

Example answer: During our research, we did find information in the public domain with regards to how to increase an engine’s power and there are also known methods engineers such as ours are aware of which can be used to increase the power of an engine.  These, however, only offer increased power to a point which in this case was 400bhp and our project goal was 450bhp, so no information in the public domain, or anything which could readily deduced would have allowed us to reach our project goal.

Please provide any research and analysis your competent professional undertook to establish that the uncertainties listed on your R&D report and supporting information were uncertainties and not complexities and challenges. Please can they explain how the uncertainties for all projects are of a scientific or technological nature as opposed to routine uncertainty. Refer to Para 13, 14, 29 & 30 BEIS (2004) guidelines when formulating your response.

Bear in mind that just because your company does not know if something could be done, does not make it an uncertainty.

For the purposes of R&D tax relief, there is a clear distinction between complicated non-qualifying projects and those which qualify as they have genuine uncertainty, so this section is designed to demonstrate to HMRC that your project wasn’t just complicated and time consuming but that the required uncertainty existed.

The last sentence about your company not knowing if something could be done, is to ensure that the uncertainties you identified were field wide and not just due to your own lack of knowledge or experience.

Example answer: At the start of our project, we first undertook a great deal of research by searching online, reading printed technical articles and speaking with other competent professionals working in our field.

We then initially attempted to design our desired technology using the knowledge we had obtained but found this would not be possible and at this stage we came to the conclusion that the project would not just be complicated, but would be genuine qualifying R&D as it was technically uncertain if the development we were attempting could actually be achieved.

As HMRC mention specific BEIS guidelines, it’s a good idea to address each of these in turn, as even though a lot of this information may have been provided already, putting into context of how it applies to the guidelines will help HMRC see that your project meets the various criteria for qualifying R&D.

BEIS (2004) Para 13, “Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. This includes system uncertainty. Scientific or technological uncertainty will often arise from turning something that has already been established as scientifically feasible into a cost-effective, reliable and reproducible process, material, device, product or service.”

Example answer: We were unable to find any information in the public domain, or any existing engineering methods which would allow us to meet our project goals, both our competent professional and other competent professionals working in the industry we discussed the project with were unable to readily deduce if our project goals would be achievable, so we believe this means that technological uncertainty existed.

BEIS (2004) Para 14 “Uncertainties that can readily be resolved by a competent professional working in the field are not scientific or technological uncertainties.”

Example answer: Neither our own competent professional, nor any of the others we spoke to, all of which are working in the field, could readily resolve the uncertainties. If they had been able to the project would never have reached the R&D stage.

BEIS (2004) Para 29 “System uncertainty is scientific or technological uncertainty that results from the complexity of a system rather than uncertainty about how its individual components behave. For example, in electronic devices, the characteristics of individual components or chips are fixed, but there can still be uncertainty about the best way to combine those components to achieve an overall effect. However, assembling a number of components (or software sub-programs) to an established pattern, or following routine methods for doing so, involves little or no scientific or technological uncertainty.”

Example answer: For this project, our prototype was developed using some off the-shelf-components combined with those which we had to design specifically for this project and we also had to develop new engine management technology to control how all of the various components would work together in an attempt to achieve the advance being sought. This was in no way an established pattern and did not follow any routine methods, as no one had ever attempted to do this before so no such method exists.

BEIS (2004) Para 30 “Similarly, work on combining standard technologies, devices, and/or processes can involve scientific or technological uncertainty even if the principles for their integration are well known. There will be scientific or technological uncertainty if a competent professional working in the field cannot readily deduce how the separate components or sub-systems should be combined to have the intended function.”

Example answer: We were not just combining standard technologies, as those which already exist would not be fit for purpose. We were combining some standard technologies with the new technologies we had to develop for this project and then try to develop a suitable way of controlling all the components to achieve our project goals.

Please provide details of the research conducted to establish your baseline for this project

• Describe the baseline in technology that the advance sought was being measured against.

Baseline technology is the term used by HMRC to define the level of technology already available at the start of the R&D project, against which the advance being sought is measured.

HMRC would expect you to have conducted some research at the start of your project, and before undertaking qualifying R&D, to establish what the current baseline is in relation to the technology, not just the baseline for your industry, as only once you know what the technology baseline is can you be certain that what you are looking to develop will represent a genuine advance.

Example answer: As we work in the automotive engineering sector we keep up to date with the latest engineering developments by speaking to others in our field and also reading information both online and published for our industry and engineering in general.

These research methods allowed us to correctly identify the technology baseline for the project which our sought advance would be measured against.

• Describe the advance or appreciable improvement in the overall field of technology sought or achieved, and its impact on the field as a whole. 

For this section you should expand a bit on your previous answer with regards to the advance you are seeking to create, ideally provide some details about other potential applications of your technology to show that it’s a genuine advance for the whole field, with uses other than just the one you are focused on.

Example answer: Our industry as a whole is always seeking new engine technology capable of producing more power without needing to use bigger engines.

This is especially crucial at present as much lower emissions limits mean that simply using a bigger engine to give a vehicle more power is no longer feasible.  This is a major issue for small volume car manufacturers as they rely heavily on readily available technology to ensure the vehicles they produce are not only as fuel efficient as possible, but that they also meet all relevant emissions standards.

So if we can create our desired technology this would not just represent an advance for ourselves, but also the wider field as it would allow car manufacturers to utilise our technology to improve the vehicles they are developing.

Please confirm if costs for software have been claimed, if yes please ensure you have provided us with 

• the rationale and methodology used to come to any apportionment
• supporting evidence of the total costs and the amount claimed
• confirmation that all the amounts included above have been incurred

If you have included any software costs as part of your R&D expenditure you should provide details of these, including any apportionment methods used and any associated invoices.

Confirmation that all of the amounts have been incurred relates to the rule that in order for a cost to be included as part of a claims R&D expenditure that it has to have actually been paid, it can’t just be accrued for in your accounts.

Example answer: Please find attached an invoice relating to the CAD software licence costs we have included as part of our R&D expenditure. As this software is used for both non-qualifying and qualifying R&D work, with a 80/20 split, we apportioned this cost at 20%.

We settled this invoice 7 days after it was received and please find a partial bank statement also attached to confirm this.

For consumable costs included in the claim for R&D tax relief please ensure you have provided us with

• the rationale and methodology used to come to any apportionment
• supporting evidence of the amount claimed (For compliance purposes we would need to see all invoices and evidence)

As with software costs, HMRC need to see how you calculated your consumable item costs and they also need to see the associated invoices.

Example answer: The consumable item costs included for this project were invoiced separately by our subcontractor, ABC Engineering Limited, and please find attached 3 invoices which total the amount we have included as consumable costs for this project.

For the avoidance of doubt all of these invoices were settled prior to our claim being submitted to HMRC and none of these consumable items were used in the creation of a product which has, or will be, sold and were exclusively for use in a prototype system which we will use for internal testing purposes only.

If you have any questions on this blog or anything R&D related, please contact us at [email protected].

Posted: 14 Aug 2023