How Should I Allocate My Staff Time For An R&D Tax Credit Claim?
R&D Tax Credits were launched by the UK government in the year 2000 for incentivising British companies to innovate and grow. The idea of the scheme is that companies engaging in any projects that look to create new products or services - or improve existing ones - can claim a portion of their Corporation Tax payment back. The main stipulation is simply that the work looks to solve a particular scientific or technological advancement - and the scope for a claim is purposefully broad.
One of the costs that can be claimed for is staff time required to work on the R&D project. This is not as straight-forward as it sounds however, as it’s vital to allocate your employee’s time on a reasonable and fair basis. It should reflect the amount of time they have spent on eligible research and development work only, and be backed up by accurate records.
When it comes to R&D Tax Credit claims, staff costs are classed as eligible expenditure. But only the costs of employees and directors who are engaged directly in applicable R&D activities can be classed as eligible. If only a proportion of an employee’s or director’s work is taken up in relevant R&D, the relative proportion of their time (and costs) can be included in your claim.
What about direct and indirect staff costs?
For an R&D Tax Credit claim, eligible staffing costs come under two categories:
- Activities which have directly contributed to solving a specific scientific or technological uncertainty;
- Eligible indirect activities (‘QIAs’).
Essentially, any employees that have actively and directly been engaged with R&D activities, and the extent of such engagement, should be based on the duties they have undertaken. This means that the allocation of an employee’s time should be about time spent on eligible R&D activities only across the claim period.
When allocating an employee’s time, it’s recommended you consider the following:
- What eligible R&D activities did the employee complete over the course of the year?
- For each of the projects, what eligible R&D work did the employee take on?
- What percentage of the employee’s total time did this R&D work take?
Record-keeping for staff costs
In reality, not every company will maintain detailed records about the hours their employees spend on R&D work, as frankly it takes up a lot of time and effort. Additionally, many businesses claiming for the first time will be looking to obtain the relief for activities carried out before they even knew R&D tax relief existed.
Luckily, there isn’t any specific record-keeping requirement for R&D Tax Credit claims as outlined by HMRC. However, there is a general expectation that companies will keep sufficient records to support their claims, as is the case with other entries on the Corporate Tax return. In practical terms however, HMRC accepts that many first-time applicants may not possess detailed contemporaneous records. In this case, claimants should take a pragmatic approach when apportioning an employees’ time to relevant R&D activities. The important thing here to remember is that staff allocations are done prudently and are backed up by evidence of some kind.
On a year-by-year basis, HMRC expects companies to proactively implement and review mechanisms by which staff apportionments are made and how this is evidenced. Where possible, all record-keeping should be done contemporaneously.
A particularly common solution is in providing timesheet records as part of the paperwork submitted in an R&D Tax Credit claim. However, timesheets are not infallible and are not always the best way - it depends on your company structure and the R&D work completed. Any employee apportionments must be considered on a case-by-case basis to make sure that they accurately reflect the amount of time a staff member has spent on the R&D project. This culture of proactively analysing time spent should remain in place for as long as the company wishes to submit R&D claims.
What general records do I need to keep for an R&D Tax Credit claim?
As mentioned, there is no fixed method of record-keeping stipulated by HMRC. As many companies are first time claimers, they will not be barred from claiming simply because they don’t hold detailed contemporaneous records. However, accurate judgement is expected and some documentary evidence needed about what took place and when, with repeat claimers expected to maintain adequate records going forward.
HMRC understands that record-keeping amongst individual companies will vary, however the nature of R&D work is that it’s systematic. That’s why it will expect some evidence of R&D activity to be demonstrated in your company’s records, for example some form of planning.
What does HMRC consider to be good record-keeping practice for R&D Tax Credits?
R&D is all about being forward-looking instead of retrospective; such work takes place when a project is looking to enhance or solve something. So once a company has made its first claim, it’s important that it implements a reasonable record-keeping procedure for any claims it then makes in the future.
For many years, HMRC has encouraged bigger companies and regular claimants to consider implementing and maintaining more contemporaneous records-keeping systems. But HMRC recognises that not all claimants will have implemented exhaustive record-keeping systems if there was no business requirement to do so before they decided to claim. Timesheet procedures are usually the preferred record-keeping system for R&D claims, but the key thing is that whatever approach you choose is accurate and clear. If HMRC can see that you have tried to apportion staff time fairly then it is unlikely to raise any issues; it’s about what best suits your business. For instance, a software company might well already have a timesheet system set up for client projects, which can also be used for recording R&D work.
Speak to the R&D tax relief specialists
The team at Myriad Associates is backed by years of experience in dealing entirely with R&D tax relief claims. We can help you with any aspect of record-keeping and your R&D Tax Credit application in general - it’s all we do and it’s what we excel at.
If your company has completed any kind of R&D activity over the last two years, why not try our Tax Cloud calculator to see what R&D tax relief you could claim. It’s quick and easy to use, and for many companies the resulting money is a real game-changer.
Get in touch today by calling 0207 118 6045 or use our contact page and we’ll be pleased to support you in any way we can.
- Submitting R&D tax claims since 2001
- Strong track record spanning 20+ years delivering R&D tax credit claims
- Over £70m claimed and counting
- Industry leading specialists
- We employ technical, costing and tax experts and tax experts
- Confident of delivering value to our clients, we offer our R&D tax services on a success fee-only basis.
Meet some of the team behind Tax Cloud