I recently spoke to a company who found themselves in the midst of an HMRC enquiry into their R&D tax relief claim. This wasn’t my first time at the rodeo, of course, but it struck me that the director of the company began our conversation by stating the business had claimed R&D relief “successfully” in the past. While I’m experienced enough to know that claiming ‘successfully’ has little bearing on a HMRC enquiry, the director appeared to be none-the-wiser.
A recently concluded tax case illustrates how common this misapprehension is among businesses. Having previously claimed for R&D tax credits without challenge, the company in question spent five years defending their claims to HMRC, along with a further two and a half years spent attaining a judgement from the tax tribunal. Like my client, the company’s confidence was based on a misunderstanding of the self-assessment process. The judge ultimately accepted just one out of seven R&D projects presented, and those previous claims counted for nothing in the defence of the ones under scrutiny.
If you’ve ever had to deal with a client who has taken bad advice and made a potentially spurious R&D claim, I sympathise entirely. It’s a difficult relationship-triangle between the client, who has bought into the promise of funding, the R&D tax adviser, who has delivered this promise and wants to keep it so they get their fee, and the accountant, who is usually the only one with a full understanding of the risk.
If the accountant advises against the client filing the claim, but the client goes ahead and receives the cash, they will feel that they and the R&D adviser have been vindicated. But obviously, all that has happened is they’ve potentially ‘got away with it’ – for now.
As with the aforementioned tax case, the problem snowballs if the company makes subsequent claims. And with each ‘success’, the company gets more confident that it’s getting it right. But it may not realise that HMRC hasn’t actually ‘approved’ their claim or claims.
It may only be a matter of time before HMRC does ask questions, and if a company is subject to an enquiry, in the best case scenario it has to pay back any money it received erroneously, with interest. Worst case scenario includes penalties (up to 100% of the tax due), plus potential amendments to earlier claims. Harm to a company’s reputation with HMRC is a further cost due to wider checks that could be subsequently made.
Right now, there’s a dangerous misconception that HMRC won’t unpick earlier claims, but they can actually look back up to 20 years, although that only applies in the most extreme cases. HMRC is fed up with erroneous claims; in 2018 it successfully identified and shut down fraudulent activity that it estimated would have cost the Exchequer £300m and clearly believed that the scale of the problem may be significant. As a result, it’s taking R&D claimants to court and winning and HMRC inspectors will use the powers available to them.
Accountants might assume that clients are aware of these basic concepts, or think that other advisers will explain it competently, but this isn’t the case. As an industry, we need to work together to educate clients so that they understand the process and risks when making an R&D claim.
For example, some companies don’t realise that their R&D claim is part of their self-assessment tax return. They also don’t understand that even though they use an adviser, they still need to actively understand and manage their own risk.
The vast majority of businesses are unaware that the tax advice market is unregulated. Recent research from YouGov shows that just 10% of businesses know this fact. The rest either don’t know or think HMRC is responsible for it. Your clients might not be aware that literally anyone can set up as a tax adviser, even if they have no qualifications, skills or experience.
If clients fail to do due diligence or ask the right questions when they sign up with an adviser, they’ll wrongly assume someone else in the background will protect them should anything happen. Only if they engage with a regulated adviser will they have this protection or can ask for a professional body for help.
If you suspect that your client is making a bad claim with an R&D adviser, look for whether it is a regulated member of a professional body. R&D tax advice is a highly specialised area, so advice being given by unqualified advisers should be a bright red flag. An unregulated adviser might be diligent, but if they are not, they may be leading your clients astray over many claims and when things go wrong, simply leave them in the lurch (I also noted in the tax case mentioned earlier that the company and their adviser had parted ways during the HMRC enquiry).
If you’re unsure whether they’re working with a regulated specialist, you need to ensure your client is confident in the claim. Now ‘confident’ is the operative word here. To be confident in a R&D tax credit claim doesn’t mean thinking it’s correct, it’s about knowing why it’s correct. A company’s competent technical professional must be prepared to explain, under scrutiny, why specific projects qualify for the incentive.
HMRC will always want details of the projects from a competent technical professional in an enquiry. Recent tribunal judgements have hammered home the critical role of these technical testimonies in securing a positive result. If the professional in question is unable to give a convincing, definitive account of the R&D project, it can easily lead to an unfavourable verdict (even if the claim is actually legitimate).
The only way for a company to rest easy is by being confident their team understand the claim, can explain it to HMRC and have the records to support it. If you’re not certain that a client’s previous claims would withstand serious scrutiny, now is the time to help them improve those processes and records. The enquiry process will look at a company’s latest claim or claims and only look further back if there are problems.
While an HMRC enquiry shouldn’t be dreaded, it is a huge uncertainty unless you are confident your client can answer the questions they raise. But like I say, it shouldn’t be viewed as solely a negative experience.
Just as a bad enquiry can affect a company’s wider relationship with HMRC, so can a good one. A robust, well prepared, well-understood R&D claim will show HMRC that a company takes its obligations under self-assessment seriously and approaches its tax affairs diligently. HMRC wants companies to pay the right amount of tax, so showing them that this was your client’s aim too can be really positive.