CIRD85100 - R&D tax relief: large company scheme: Update LBS practice note

Purpose

The Large Business Service (LBS) deals with the tax affairs of the largest businesses in the UK, and therefore receives claims from companies conducting significant and substantial research and development (R&D) programmes. In 2003, LBS issued a Practice Note, on its general approach to claims to R&D tax incentives. Given the recent influx of claims due to the revised time limits for claim, the greater experience and understanding of R&D claims in LBS and the development of specialist R&D Units in HMRC this note has been updated. The central tenets of the previous note still apply but LBS practice needs to reflect developments since 2003. This updated complements the separate note for companies dealt with by the HMRC Specialist R&D Units.

Overview

The Government wants companies undertaking research and development to get the incentives to which they are entitled in a simple way that gives them:

• Early certainty (even though R&D is not part of the new clearance regime).

The ability to plan R&D activities in the knowledge of the incentives they will receive. Where companies are undertaking qualifying R&D work the LBS has taken steps to ensure our approach complements these objectives. This involves being sympathetic and supportive should the company face any problems in assessing whether its work is qualifying R&D and if so how much tax relief it is entitled to.It is vital that we balance these objectives against the need to make legitimate enquiries into R&D claims where our risk assessment indicates a possible problem. The paragraphs below under procedure set out what we will do to achieve this balance and our general approach to R&D claims.

Roles and responsibilities

Phil Gilbert – CRM Manufacturing Sector - has a cross-LBS role on R&D and liaises directly with the Unit Heads. He will be responsible for co-ordinating the involvement of the Specialist Units in providing support to LBS

Phil Longfield – SPM in SRU based in Liverpool LBS CT – is to take on a project management/co-ordination role. The aim of this will be to assist policy development in this area.

Procedure

Officers in the LBS are in regular contact with the customers who they are working with and, in accordance with the recommendations of the Review of Links with Large Business (RLB) and LBS Operating Model, seek to develop an in-depth understanding of the structure and activities of the businesses.

These central planks of the LBS Operating Model identify our intention to work with our customers so that we understand the operation of their businesses. This will inform our risk assessment process and set the tone for our work with them. Claims to R&D tax relief are a prime area where this understanding can pay dividends to both our customers and LBS so we will:

• Be open to early and ongoing contact from our customers to determine whether they are undertaking (or will be undertaking) qualifying R&D activity and help design the process by which they will arrive at the quantum of their claim;
• Work with customers to develop simple procedures which will result in acceptable claims. In general these should draw from and fit with the company’s existing processes and accounting systems to avoid a disproportionate amount of extra work being needed to formulate the R&D tax relief claim. We should, as far as possible, aim to design procedures that will avoid significant changes to companies' existing accounting systems;Encourage customers to include in these simple procedures;
• • The decision-making scientists / engineers in the company with an understanding of what activities may qualify for relief;
  • Experienced engineers / scientists deciding whether there is the requisite scientific or technological uncertainty in the activity to qualify and that there is a record of this decision making;
  • An identified start and end of qualifying activities.

• Advising customers what records we will expect to see in support of their claims and, in particular, advise on what documentation will facilitate the determination of whether or not the R&D in question qualifies;
• Ensuring that the process identifies the costs of qualifying staff (employees and externally provided workers), consumable items and software and so satisfy ourselves that the process, if followed correctly, will produce an appropriate R&D tax relief figure in the Company Tax Self-Assessment return or separate claim if not made in the return;
• Asking customers to identify any ‘problem areas’, where it is not certain if the R&D will qualify for relief, for early discussion;

Our customers have a significant role to play in this process and we need them to be:

• open and clear about their R&D activities;
• helpful and co-operative.

This will allow us to reach a mutually acceptable and agreeable position as quickly as possible so that LBS can provide the early certainty that our customer’s need.

The CRM and Tax Specialists will have a key role in encouraging dialogue with customers about their R&D work and helping them to formulate claims.

Approach to Claims and Assurance WorkIn line with RLB, LBS will not undertake any risk assessment of claims from customers with whom we have a low risk relationship. All other claims to R&D tax reliefs will be risk assessed in the same way as any other claim received by LBS. If the risk assessment does not demonstrate either an absolute or relatively significant tax risk in relation to the business then, excepting where challenge may be needed for sector or regime integrity, the claim should be accepted. This will particularly apply where we have agreed the content of the claim up front with the business.

If we need to enquire into the claim then we will focus our enquiries onto those areas which cause us concern and will seek an early opportunity to discuss them with the customer. It would be helpful for us to get access to the people within the company undertaking the R&D work so that we can discuss our concerns direct with them as well as accounting or finance staff who have prepared the submitted claim. Our aim here will be to minimise compliance costs and to seek ways in which the company processes can be amended, where necessary, to produce acceptable claims in the future.

Where, despite our best efforts, the customer fails to put in acceptable processes and as a consequence there are significant risks to the Exchequer, or it persists with incorrect claims, it may be appropriate to modify the general approach in this note.

Sampling

LBS accepts that there may be occasions where the extent of the work that would be required to follow through and formulate a claim is such that this would be disproportionate compared to the benefit received. They do not want to discourage claims being made and so, in such circumstances, they will be open to the use of sampling techniques where:

• these techniques can be relied upon to give a reasonable answer in the circumstances as ‘harder’ information is not available to produce and support the claim;
• the process involved in arriving at the sample is transparent, open and utilises the information that is held and available from the business in a way that gives an answer consistent with the work and cost incurred by the business;
• LBS are provided with full supporting detail of both the underlying information and assumptions relied upon and are given the opportunity to challenge not only the final sample but also all the information used by the business if appropriate.

LBS Officers will have in mind the potential risk that the use of such techniques poses both in absolute and relative terms to the claim and wider customer and will tailor their approach accordingly. If the potential claim presents little overall risk to the tax position of the customer then LBS may accept a greater level of estimate than one which poses a high risk. The exception to this will be where there are questions of sector or regime integrity.

Part of the reason for this more lenient approach will be that LBS will want to ensure that the systems and procedures currently in place are sufficient to produce accurate and acceptable claims. The work will therefore be two-fold, clearing the past and establishing proper procedures for the present and future.

Whilst this approach to sampling is especially important in considering the influx of past year claims it may also apply to work moving forwards. LBS wants to agree procedures that produce acceptable claims and sampling could play a part here. However, the expectation will be that, where businesses wish to use sampling, the methodology, potential size / nature and reasons for what may be a less accurate claim will be discussed and agreed in advance. Customers should not expect that agreement will be given to use of sampling in all circumstances. LBS will need to be sure that there are valid reasons why a more accurate claim cannot be made and may want to explore both those reasons and consider carefully what the difficulty in producing an accurate claim may say about the quality of the underlying records and source data.

Treatment and Resolution of Prior Year Claims

The Finance Act 2006 changed the period in which a business can make a claim to R&D Tax Credits from six years from the date of the accounts to two years and set a last date for receipt of claims for periods of account prior to 31 March 2006 of 31 March 2008. In common with the wider HMRC, LBS has had an influx of claims for earlier periods. Many of these claims may be based on estimates as the customers concerned may not have had systems in place to correctly identify all qualifying expenditure, their records may not be exactly as LBS would wish or the staff who were there when the work proposed for relief was undertaken may now have left the company.

As stated above LBS is firmly committed to helping our customers to claim incentives where they are able and so will take a pragmatic approach to the quality of supporting information for claims for earlier periods. They will also be open to the use of agreed sampling techniques in formulating claims (see next section).

HMRC issued Revenue & Customs Brief 70/07, which outlined a number of points on the time limit changes. These points apply equally to customers dealt with in LBS as they do other customers.

Specialist R&D Units

One of the key requirements that customers have told HMRC they want is consistency of treatment. LBS recognise that they have to be consistent both between the various sectors and with the rest of HMRC. Work on R&D tax reliefs in the wider HMRC is dealt with in specialist Units established in 2006.

LBS and the Units Heads have agreed a working protocol to involve the Units more widely in reviewing claims for R&D tax relief that are received by LBS. This will allow the Units to bring their experience to bear in reviewing the claims and, where needed, to focus their compliance activity onto the largest and most significant R&D risks in any claims received by HMRC rather than excluding LBS work as previously. It is not the intention that the Units will assist with the working of all LBS R&D claims only those where more experience or broader specialist R&D credit knowledge is needed. Responsibility for working any enquiry will remain with the LBS CRM and customer team.

Within LBS we are looking to have someone in each sector who can be a contact point for R&D matters and who can be used as a 2-way conduit for important messages. In addition there is a central role within LBS with an oversight of R&D work in LBS and with direct links to the R&D Unit Heads. Taken together these will facilitate the sharing of our experience of implementing R&D tax reliefs with each other in order to build up a common understanding and ensure consistency of our approach.