A company can reduce its tax bill by claiming enhanced expenditure based on the money spent on R&D activities. But has it been too easy to submit claims, and have they been scrutinised properly by HMRC?
If you think you might have an R&D Tax Claim, we can help.
First of all, some technical stuff:
HMRC’s guidance states that R&D for this purpose is not just for “white coat” research, but can include technological advances in:
- Creating new processes, products or services,
- Making appreciable improvements to existing ones,
- And even using existing science and technology to duplicate existing processes, products and services in a new way.
In order to qualify, you need to be able to answer “YES” to these questions:
- Does my company have a project?
- Am I seeking an advance in a field of science or technology?
- Does the advance extend the overall knowledge or capability in the field of science or technology and not just the company’s own state of knowledge or capability?
- Does the project involve an uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge?
R&D Claims firms have been cold calling companies and persuading the managing director that the company is eligible for a tempting tax repayment because of the company’s R&D activities, which hitherto the MD had been unaware of. “It’s not your Accountant’s fault,” the MD is told. “Your Accountant isn’t an engineer/electrician etc, so he/she wouldn’t have known about the R&D. We can make the Claim for you and obtain a corporation tax repayment for your company.”
The MD agrees, has a meeting with the Claims company representative, signs documents authorising the repayment to go to the R&D Claims company and readily signs off the R&D Report (required by HMRC as part of the Claim) in keen anticipation of an undreamed of tax repayment.
(A Claim is effected by re-writing the Corporation Tax Return)
The Report and Claim is submitted. The tax repayment goes to the R&D Claims company, who deduct their fee (generally 25%) and pass the net repayment to the company.
Sometime later the Accountant learns about the repayment from the excited MD who will say how great this is, and how it had all been explained to him that some of his company’s activities (which often amounted to nothing more than using their existing skills and experience to solve their clients’ problems) were really R&D. And what’s more they will be able to claim every year! It’s like having a magic money button on the MD’s desk, and all he has to do is press it annually (albeit perhaps a little more furtively and guiltily each year?).
The Accountant is speechless. For a relatively modest fee the Accountant has painstakingly helped the client prepare accurate Accounts and a Corporation Tax Return which includes all possible legitimate claims for myriad expenditures – in great detail. Pulling together the complex strands of the typical business in compliance with the raft of Accounting Standards, Companies Act, Tax Legislation, as well as complying with their Institute’s Professional Standards
And, often without being kept in the picture, the Accountant learns that the company’s tax liability has been more or less obliterated by an R&D Tax Claim, in a business where the Accountant is astonished to learn that the client now believes that R&D has been carried out. The Accountant has blundered into an alternative Universe where paying Corporation Tax has become voluntary!
As the Accountant picks through the documentation, the size of the R&D Claims company’s fee becomes apparent – being orders of magnitude greater than the Accountant’s annual fee for hours of meticulous professional work.
Typically the Accountant will offer a word of caution about the Claim, which HMRC could challenge and perhaps disallow in due course plus interest and penalties. But by now the MD is a believer and the Accountant is told not to be so cautious and to stop being on HMRC’s side.
The Accountant sighs, and thinks, “Oh well, at least HMRC will pick it up and disallow it. Surely HMRC read all the Claim Reports”.
But HMRC has been silent, and possibly acquiescent. Little seems to be challenged by HMRC.
And when it is – the findings are shocking. When the case of AHK Recruitment Ltd reached the First Tier Tribunal it was revealed that there was no justification or supporting evidence for the R&D Claim whatsoever. There was a similar situation in the case of Tecklsolutions-Inc Ltd, where the penalty for submitting a claim which could not be substantiated was £25,791.
What is going on?
Well, see what you get when you input these words into Google: “government commitment to R&D”
Could it be that the incentive driving officials, including HMRC, for increasing the annual amount paid out under R&D Claims is greater than the incentive to check them?
As this scenario has played out over the last few years, professional accountants in practice have become exasperated.
Of course there are some highly ethical R&D Claim firms out there.
And of course it is vital that companies do not miss out on claiming the Tax Relief to which they are entitled.
We have been increasingly on the look out for R&D Claim opportunities for our clients.
We are also best placed to work with our clients to prepare the R&D Claim Report and submit the Claim, for a reasonable fee I might add. As a firm we are moving from observers of R&D Claims Firms in action, to participants in this field of work. Being careful, of course, to comply with our Institute’s professional guidelines, including those which specify that we should only carry out work if we are sufficiently qualified and experienced to do so.
I prepared an R&D Tax Claim for the last 2 years for a client the other day. The process includes a lot of hard work by the client toiling together with us in drafting the wording of the technical aspects of the Report, under our guidance of what is required by HMRC.
Preparing a Claim Report involves a significant time commitment by the MD and other client staff because only they know, and are able to describe, the intricacies which make the Claim understandable and valid. (It is for this reason that one of our clients who is eligible to submit Claims – and has done so in the past – does not bother any more, because of the disproportionate amount of time – as he sees it – required by the MD to give a proper description of the Projects compared with the relatively small amounts of tax relief. They are not big projects in this case)
Long winded Claim Reports, containing a blizzard of words which wear the reader down, prepared by Claims Companies after just a brief discussion with the MD are likely to crumble if subjected to a searching/challenging scrutiny. They cannot be valid without a big involvement from the MD/staff because, to be blunt, some of the content would have to be made up, or at least padded out with nonsense – often about “Bespoke projects” (Bespoke does not make it R&D) and descriptions of bizarre technological uncertainties.
From a personal point of view, I find the process of helping a client prepare a “proper” R&D Tax Claim extremely satisfying.
While I’ve forgotten a lot of the content of my Degree in Physics, I still have the scientific method ingrained in me.
As a practising Chartered Accountant with a Physics Degree, I’m in a pretty good position to pull together the scientific, accounting, taxation and ethical issues that arise when preparing an R&D Tax Credit Claim.
Please get in touch if you would like to fix up a time to discuss a potential Claim.
For a new Claim we could look at getting you into the HMRC’s R&D Advance Assurance Scheme