Part of the work of producing an R&D Tax Credits claim is to write what’s called a “technical narrative”. Why? Why does it matter? What difference does it make?
The objective: avoid an enquiry
The goal of the technical narrative is to produce a cohesive and coherent text that presents the company’s R&D work in a way that passes HMRC’s inspection without further questions.
It is very important to do this part of the work well and thoroughly, because HMRC enquiries are especially time consuming when they centre on the technology and whether it qualifies. So long as the technical work is well done (and, of course, the company actually qualifies from a technical perspective), HMRC will likely pass it without any technical questions. If, however, it is poorly presented or unconvincing, the enquiry process can go as far as asking questions like:
These are actual questions received on a technical HMRC enquiry. I am not kidding.
We don’t believe that these questions are representative of the definition of R&D in HMRC’s legislation, and have argued this before. In our experience, they are also not typical of the average enquiry – usually HMRC ask more sensible questions and do not ask a client to justify why each line of code is R&D. However, it is painfully obvious that rather than get into this sort of argument, it is better to avoid the discussion entirely and do the technical work well.
Before you start: get the right data
So – how do you nail your technical narrative to avoid getting stuck in the enquiry quagmire? Depending on the size of your company, it may be suitable for the person who was closest to the R&D to be the one producing the technical narrative. However, even in those cases, that’s not always desirable, if only because that person’s time is likely under a lot of demand already. Again, the key objective here is to make a solid technical narrative. It is much cheaper to get an extra person involved and add a couple of process steps than to deal with an HMRC enquiry on the technology; bear that in mind as you choose to skip steps (as some no doubt will).
The person providing data about the R&D needs to be a developer or technical-person (not a manager) who was directly involved in the R&D and who genuinely believes that the technology is innovative.
We usually observe several signs that flag up we’re talking a manager. They talk about:
- process issues like the users/customers constantly changing their requirements;
- process issues like the delivery being off schedule and this impacting dependencies and requiring careful stakeholder management;
- difficulties getting the project funded or approved;
- problems with planning the work;
- issues with the timelines being very tight;
- issues with procurement, obtaining the resources required for the project;
- issues with governance, deciding how the project will be managed, led, directed, what it will aim to achieve, etc.
Even if the person is technical, there are other signs we may be talking to the wrong person. The wrong technical person will say things like:
- nothing difficult was actually developed; it was all fairly routine;
- can’t remember anything that was developed in that period, it seems like too long ago.
If you’re getting the data from the wrong person, it won’t be great quality. If it’s not great quality, the writer’s job will be made much harder, as they can only really operate within the data (otherwise they’d just be making stuff up).
It’s also worth considering, especially if you’re preparing and filing your own claim, that your technical people will have to be part of the claim defence process if the claim does get challenged – so finding someone on your team who’s knowledgeable about the technology and willing to argue that it’s innovative is quite important.
Writing the narrative
So, once you have this high quality data to work from, how do you actually write the technical narrative so it passes all of HMRC’s checks with flying colours? Stick around, we’ll be posting that up next week.
- A bad technical narrative is likely to attract lengthy and expensive HMRC enquiries.
- A good technical narrative is an essential component of a successful claim.
- Writing a good technical narrative starts by collecting the right data from the right person.