Even though 90% of R&D tax relief claims are produced with the help of a specialist adviser, as many of half of them could contain mistakes! These were the findings of HMRC’s Mandatory Enquiry Program (MREP) published in July 2023.
Since then, HMRC have brought in a number of measures to help businesses meet the compliance requirements. Most notably, they published the new Guidelines for Compliance – GFC3 in October 2023.
Before this point, knowing what information to present to HMRC in support of an R&D tax relief claim was challenging. Even though HMRC was much stricter about the standards they set for claims, there was no specific guidance that clearly laid out their expectations.
That’s why publication of these new guidelines had many R&D tax advisers let out a sigh of relief. There’s now a clear and defined set of rules that can be used to help clients avoid penalties and prepare compliant claims. Still, it is a bulky document, and you might be wishing that there was a guide for how to use the guidance. Well, good news for you, there is!
What is the GFC3?
The new Guidance for Compliance for R&D tax reliefs (GFC3) joins HMRC’s existing collection of GFC documents. The guidance aims to clarify existing DSIT guidelines, to help advisors and business to better understand what is (and is not) considered R&D for tax purpose. The GFC3 has provided much needed clarity and shows claimants and their advisors the information HMRC expects to see in support of a claim. It includes sections on:
- How to identify a competent professional,
- How to establish if the work qualifies as R&D for tax purposes by:
- Understanding the meaning of ‘scientific or technological advance’ for the purposes of R&D claims,
- Judging if a project is seeking an advance in science or technology,
- Identifying and evidencing the scientific or technological uncertainty that the project is looking to resolve.
- Where the project begins and ends for the purposes of an R&D claim,
- What evidence HMRC needs to see that a project qualifies.
The guidance can really help you when preparing claims, and even when screening them in the first place. They make it really clear that the client is expected to provide a lot of detail information, and to take ownership of the process. By laying out the realities of claim preparation, using GFC3 as a referencing tool, you can ensure everyone enters into the process with the same expectations.
The questions in the GFC3 can also help you to establish the eligibility of your clients’ projects more efficiently. You can avoid spending a lot of time preparing for a claim which you later realise you can’t submit, and the client starts the process with a clear view of which of their projects will qualify for relief.
Using the GFC3 in Practice
The first step is for your client to consider their projects and provide clear and concise answers to these 6 questions. We’ve summarised them from the GfC3 parts 3 and 4. The answers will help qualify and quantify the R&D activity.
- Can you identify a project with a clear start, end, and plan of activities?
- What is the field of science or technology involved in the project? If it’s a social science, an R&D tax relief claim can’t be made. (For a list of fields, see Table 2.2 in the Frascati Manual 2015, page 61)
- Did the project seek to create new knowledge or capability in the identified field of science or technology?
- Is the project led by a person competent in said science or technology? Does this person have qualifications, experience, and current industry knowledge to identify the possibility of new knowledge or improved capabilities?
- Does the person leading the project know what the industry uses as standard technologies or the level of existing scientific knowledge? Also, what are the limitations and why are existing capabilities insufficient to complete the project?
- Were there significant technological uncertainties that the project aimed to resolve that existing industry capabilities couldn’t?
If your client can’t answer ‘yes’ to all 6 questions, then their project won’t qualify for relief. If the answers are ‘yes’, you should make it clear that more detailed evidence will be needed. In some cases, you might need to spend a bit of time with the client in order to help them answer accurately. You might even decide to charge a separate fee for this first step to avoid those who aren’t serious about preparing a compliant claim.
Once you’ve established the project’s eligibility, your next step is to flesh out each answer using the 13-step approach outlined in the GFC3. You can attach this report to the CT return to provide HMRC with more information than what’s covered by the Additional Information Form. This might include details of the people leading the projects, their competencies, and a breakdown of the costs across each project.
Providing accurate and detailed information makes it much easier for HMRC to support the claim. If you don’t provide the right information, or you fail to answer all the questions, this hurts the strength of your client’s claim and draws HMRC’s attention. Besides, HMRC will ask for any information that you don’t include at this step eventually.
Learn more about the GfC3 for R&D tax relief claims
This article has outlined some of the first steps you can take to incorporate the new guidelines into your work. Over the next few weeks and months, we’ll be releasing more articles that delve deeper into the guidance, and help you incorporate it into your processes for claim preparation and enquiry defence. If you want to stay in the loop, make sure you sign up to our newsletter for updates.