Devising an appropriate methodology is one of the most important factors in preparing a claim for R&D Tax Credits.
The methodology will ultimately determine the size and robustness of your claim, with an inappropriate choice either not providing the level of benefit you are entitled to, or not providing a suitable level of robustness - thus leaving you open to an HMRC enquiry.
There are a number of factors which should be considered when deciding upon the appropriate methodology. These include:
What timesheet or project data (if any) is available
Whether this existing data is complete and reliable
What information other members of the team are authorised to see (e.g. salary and third-party costs)
The magnitude of the costs and what level of detail would be appropriate
Methodology Briefing Video
The following is indicative of the types of videos that help guide RD Relief users to choose an appropriate methodology.
Supported Methodologies in RD Relief
RD Relief supports three categories of methodology, which can be tailored to cover a magnitude of approaches.
Timesheet: The timesheet methodology will support the upload of your R&D project data. As your project data will be quantified by a number of hours (rather than cost), a blended rate will be applied to convert the number of hours worked into the cost incurred. Costs which are logged outside of timesheet data can be logged separately.
Project List: Where you have data that breaks down and quantifies the cost of project/s (or suppliers), this can be imported into RD Relief, manipulated online and used as a basis for the claim (or relevant part of the claim).
Person-by-person If no reliable timesheet or project list data exists, then the person-by-person methodology can be adopted. Here the remuneration details of each staff member and contractor involved in the R&D process will be imported into RD Relief. This will be used as a basis for the eligibility assessments.
Calculating the Blended Rate
Where a claim methodology is based upon using timesheet data, there needs to be a way to convert between the time logged and the cost incurred. In some cases, it may be possible to map costs on an individual-by-individual basis, but where this is not possible, a blended rate should be used.
The blended rate will essentially provide an average cost for individuals that can be used to convert the time until into a cost unit. An example of how the blended rate can be calculated is provided below:
Where project data is available (and reliable), HMRC expects companies to use it to support their claims for R&D Tax Credits.
For new claims, HMRC will often be lenient regarding the use of 'person-by-person' based methodologies. However, where claims have been ongoing for a number of years and have significant associated costs, HMRC will typically expect companies to start maintaining some form of project cost tracking.