We have become increasingly aware from several different sources, including HMRC themselves and our vast network of accountants, of the unwelcome advent of an influx of companies who are clearly viewing the R&D tax credit incentive as some sort of new tax ‘loophole’. These new ‘advisors’ have led to an increase in hugely inflated, non-qualifying claims being submitted to HMRC that add little to the UK’s innovation or global competitiveness. In response to this, we have recently learned from our HMRC contacts that R&D tax credit enquiries have increased to new highs following instruction from the National Audit Office and government ministers.
An additional cause of HMRC’s heightened scrutiny has stemmed from pressure on the public purse following Brexit and the Covid-19 pandemic, leading HMRC to take a more sophisticated, targeted approach to enquiries. The new R&D tax credit providers entering the market are offering low fees for basic services and tend to over promise and under deliver. Many of these supposed R&D tax specialists have no track record and often target sectors that are unlikely to have undertaken R&D, such as care homes.
The promise of low fees and claims of 100% success rates by new market entrants convince SMEs to avoid established R&D tax credit consultancies, however this is a false economy. With HMRC scrutiny at an all-time high, the costs of enquiries and paying fines for seemingly fraudulent claims far outweigh the potential savings made.
Cases are more likely to invoke an enquiry when:
- Development work is performed in industry sectors where R&D is unlikely (e.g. care homes)
- First time claimants and recently incorporated companies submit a claim
- Claims are retrospective
- A high percentage of the claim is subcontracted to third parties
- Claims are large or are significantly increased compared to previous claims.
Genuine claims prepared by experienced, reputable companies such as ourselves and our respected competitors will be unaffected, however HMRC’s new focus should be understood by those businesses/accountants planning the submission of R&D tax relief claims.
It’s not all doom and gloom…the government plans to increase R&D expenditure to record levels
Despite this environment of scrutiny, the government remains committed to raising the UK’s total R&D investment from 1.7% of GDP to 2.4% by 2027. This will involve increasing public investment to £22 billion per year by 2024/2025 – the largest increase in history. R&D is still fundamental to the UK’s growth plan and the R&D SME and RDEC schemes will continue to be well funded.
To be clear, those businesses that have carried out qualifying R&D activity and work with credible R&D tax credit consultancies should not be dissuaded from applying for the financial rewards they are entitled to.
The importance of due diligence in selecting an R&D tax credit partner
Applying due diligence to each claim reduces the risk of HMRC enquiries and investigations while maximising the benefits received. Those businesses lured to unscrupulous R&D tax credit service providers risk incurring sizeable fines and undergoing time consuming, stressful enquiries that last many months.
The assessment and preparation of R&D tax credit claims is complex and must be handled diligently by experienced tax experts to succeed. Considering the large financial rewards for qualifying R&D project work, selecting the right R&D tax credit partner has never been more important.
What should accountants/businesses look for from an R&D tax credit consultancy?
The differences between credible R&D tax credit service providers are many but there are several attributes they have in common:
- They demonstrate many years of experience and a strong track record of successful claims.
- They proactively identify qualifying R&D expenditure and omit unqualified expenditure that might launch an enquiry.
- They have a strong understanding of technical topics and terminology across multiple sectors – such as software, engineering, construction, and science.
- They are open and honest – and only advance R&D projects that satisfy the criteria and can be successfully backed up if challenged by HMRC.
- They offer enquiry support at no additional cost – this is not always provided by lesser experienced agencies.
- They communicate transparently – and dedicate an account manager or tax advisor to manage your case.
- They offer clear and flexible contracts – with no hidden charges or penalty fees. Fee calculations should be based on the final benefit received rather than a percentage of the qualifying expenditure identified. If in doubt, read the small print and do not be tempted by suspiciously low fees.
How can businesses & accountants reduce the chance of an enquiry?
Choosing an experienced R&D tax credit partner with a strong track record is a given. However, there are several measures that can be taken to increase the chance of success.
- Where possible, submit the claim by your filing date
- Gather project information as early as possible rather than relying on long-term memory
- Give clear project timelines and avoid discrepancies (e.g. disproportionate staff time allocation or inaccurate project dates).
- Ensure that all information is obtained from the ‘competent professional’ – including details of the technical advance sought and relevant experience or qualifications.
- Avoid references to commercial advantages or uncertainties.
How can Cost Care Tax help?
We’ve been in the tax business for over 25 years and have claimed back over £85 million in R&D tax relief for thousands of innovative businesses. From initial assessment through to the submission of a comprehensive report, your claim will be managed by tax experts who will be honest about what qualifies and what does not.
Due diligence is ordinarily enough to avoid complicated and time-consuming enquiries, however even solid cases can attract the attention of HMRC. For this reason, enquiry support is included as standard in our fees and we work directly with HMRC on your behalf to reach a resolution.
With a wealth of experience gained over many years of submitting R&D tax credit reports to HMRC, we are well placed to assess the eligibility of your claim. Call us today for a no obligation exploratory conversation with one of our tax experts.