Many assume that without formal timesheets, they can't make a claim for R&D tax relief. Timesheets demonstrate your R&D activities and allocations more accurately than any other method, so it’s no wonder that many companies expect to need them.
While documentation is critical, you don't necessarily need traditional timesheets to claim R&D tax credits in the UK.
This article explores what HMRC actually requires and practical solutions for companies without timesheet systems.
What Evidence Does HMRC Actually Require?
HMRC requires records that demonstrate staff costs are incurred in carrying on R&D, with proper allocation of time spent on qualifying R&D activities. But here's what many companies don't realise: those records don't have to be traditional timesheets.
There is no specific record-keeping requirement for R&D tax relief in HMRC’s manual and guidance, so HMRC’s officers are expected to be flexible with what records are available.
The manual gives a list of specific evidence for your R&D staff costs. You may wish to include:
- PAYE records
- Records of pension payments
- List of R&D staff
- R&D staff’s timesheets
- Contracts of employment for R&D staff
Still, there's no one-size-fits-all approach to record-keeping. HMRC understands that a multinational pharmaceutical company running dozens of research projects will have much more elaborate documentation than a small tech startup working on their first innovative product.
HMRC accepts that different industries have different norms and approaches to record-keeping. The manual states:
“The records kept by individual companies will vary; larger concerns with more than one project would be expected to have a more structured approach to record keeping than might be the case for small start-up companies undertaking their first project. But it is in the nature of R&D that it should be conducted systematically, and this should leave its trace in the records available.”
You should aim for your records to be:
- Contemporaneous (created at or near the time the work was done)
- Systematic and organised
- Sufficient to demonstrate what R&D work was done, when, and by whom
- Clear in showing the link between costs claimed and qualifying activities
Records don't have to be paper-based; electronic records are perfectly acceptable if they meet the same standards.
What matters is that your records are appropriate for your business size and the complexity of your R&D activities.
The Timesheet Question: Can You Estimate?
The short answer is yes, but you need supporting evidence.
HMRC accepts that staff time allocation can be based on reasonable estimates where formal timesheets aren't in place. The allocation principle is straightforward: where an employee spends a proportion of time working on qualifying R&D activities, that same proportion of their employment costs may qualify as R&D expenditure.
Allocations should be made on a just and reasonable basis and must reflect the actual time spent on qualifying R&D work.
HMRC may have differing opinions on your record-keeping depending on how experienced you are in making claims:
- First-time claimants: HMRC accepts that companies making their first claim are unlikely to have detailed contemporaneous records in place. Some flexibility is afforded in these circumstances.
- Repeat claimants: HMRC expects ongoing claimants to implement appropriate record-keeping processes going forward. Once you know you're carrying out R&D, you should establish reasonable record-keeping measures for future claims.
Retrospective estimates without supporting evidence or a documented methodology for allocation may lead to your claim being reviewed, reduced, or disallowed during an HMRC enquiry.
What Does "Reasonable" Allocation Look Like in Practice?
HMRC's Guidelines emphasise that good practice includes explaining the methodology used to calculate claims and detailing the background records and systems used to identify qualifying activities and costs.
Your documentation should show:
- How staff time was recorded or estimated and who reviewed the allocation
- The basis for allocation and the process used to determine it
- How the identified expenditure links to the qualifying activities
While timesheets are often perceived as HMRC's preferred approach, they're not always the most appropriate method for every business. The key is implementing an approach to identifying R&D projects and costs that suits your business and produces adequate contemporaneous evidence.
Practical Alternatives to Traditional Timesheets
If you don't have formal timesheets, here are practical alternatives that can satisfy HMRC's requirements:
Project-based tracking
Link staff to specific R&D projects with documented project phases. If your software development team worked exclusively on a new algorithm for three months, that's your evidence. Project plans, sprint reviews, and milestone documentation all support time allocation.
Project management tools
Many businesses already use digital tools like Jira, Trello, or Asana for project management. These can provide contemporaneous evidence of R&D activity if configured to tag or track qualifying work. Meeting the assignment of tasks to specific individuals, progress tracking, and time spent on projects can all support your allocation methodology.
Periodic assessments
Monthly or quarterly reviews of time allocation by project managers can work well. For example, at the end of each month, your R&D manager reviews which team members worked on qualifying projects and documents the proportion of their time spent on R&D versus business-as-usual work. Minutes from senior management meetings that review R&D projects and record staff involvement can provide valuable supporting evidence.
Email and calendar evidence
Your existing digital records can demonstrate time spent on qualifying activities. Meeting invitations for R&D project reviews, email threads discussing technical uncertainties, and calendar entries all provide contemporaneous evidence of R&D work.
The Documentation You Need
Based on HMRC's guidance and good practice recommendations, you should maintain:
- Names, qualifications, experience, job titles, and roles of staff employed in R&D activities, with clear links between their expertise and the qualifying work
- Details of how staff were allocated to R&D projects, with a description of the system used to record work on qualifying and non-qualifying activities
- Evidence of when reviews took place to identify qualifying and non-qualifying elements and who undertook the review
- Project plans, progress reports, or other contemporaneous records showing what R&D work was done and when
- How the methodology used to apportion staff time was determined and applied
Companies using Tax Cloud to make their claim can benefit from our timesheet functionality, which allows you to input the time spent on R&D per month per person and get a better and more accurate overall estimate for their time.
A Practical Example
Company A claimed £200,000 in staff costs for their R&D project. They didn't have timesheets, but they did have:
- A project plan showing which team members were assigned to the R&D project and their roles
- Monthly project status reports documenting progress against technical milestones and uncertainties addressed
- Email evidence and meeting notes discussing technical challenges and approaches to resolving scientific or technological uncertainties, which also demonstrated the staff working on the project
- Quarterly reviews by the CTO documenting staff time percentages between R&D and production support, with clear reasoning for the allocations
This combination of contemporaneous evidence supported their time allocation methodology. When HMRC enquired into the claim, they were satisfied with the approach and accepted the claim.
You Don't Need Timesheets, But You Do Need Evidence
You don't necessarily need formal timesheets, but you do need a reasonable, documented approach to allocation and clear evidence supporting your methodology.
The key is establishing your approach as soon as you identify that you're undertaking R&D and ensuring it's based on actual project facts. With HMRC's increased focus on compliance and the significant rise in enquiries (now over 20% of claims compared to around 1% previously), maintaining robust contemporaneous records is essential.
When in doubt, err on the side of more documentation rather than less. Claims are more likely to be correct if you're recording R&D as it happens, not reconstructing it months or years later.
Robust record-keeping protects your claim and demonstrates HMRC compliance. If you'd like us to review your current documentation approach, get in touch.
