In little over a year, HMRC is going to insist on extensive submissions to back up R&D tax relief claims as part of its clampdown on abuse.
If this is news to you, that’s because this measure has so far been little talked about.
It was mentioned in HMRC’s report of 30 November 2021, where it indicated that “these claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome”.
Currently R&D tax credit claims arrive on HMRC’s doorstep in myriad different formats, all containing essential numbers but sometimes little else. It is possible for accountants to enter figures on the CT600 without any supporting evidence describing what that client has actually been doing — and this was relatively straight-forward to do, since staff costs usually make up the bulk of a typical claim.
This method was always fraught with risk, particularly for smaller clients, because the ‘competent professionals’ whose testimony is crucial to substantiating claims in writing could move on or retire by the time HMRC began an enquiry. These accountants would simply have satisfied themselves that, if challenged, the information was readily available and could be provided.
This was well within the rules. However, legitimate tax relief consultancies have never operated like this. Instead, they produce extensive reports supplying all the background to a claim and explaining how the qualifying costs interact with the legislation.
From April 2023, HMRC wants to move in this direction for all claims. It will help it weed out claims with no legitimate basis and encourage claimants and their agents to remove projects and costs that don’t actually qualify.
The biggest consequence of this for accountants is how this is going to affect their time. The kind of robust report HMRC is used to receiving from R&D consultants can run to many pages of detail. These reports take days to prepare, usually stretched out over the course of a month.
Even accountants who routinely supply basic background information face a steep increase in workload. It is going to test their understanding of the legislation and add considerable overheads. Fixed fees for this type of work may become a thing of the past.
To give you an insight into what tax relief consultancies are regularly sending to HMRC, here’s a summary of the process we undertake.
It always begins with client interviews, ideally conducted face-to-face. This process can last weeks, as not everyone you need to speak to is going to be available precisely when you need them. The longest amount of time spent on a single R&D claim report at Catax stretched to 12 months because the company struggled to find the time to supply the right information to perform the tax calculations.
This is an extreme example, but the bigger the company and the bigger the claim, the more likely accountants will encounter delays.
After at least a half day of meeting with the client and their competent professionals, of which there can be more than one, a report is compiled. This report is careful to link the detailed descriptions of qualifying activity to the legislation, HMRC manuals and BEIS guidelines.
There are four different types of advance that a project might have, in accordance with the BEIS guidelines. Section 9 in the guidelines describes advances as being able to:
a. extend overall knowledge or capability in a field of science or technology; or
b. create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
c. make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
d. use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product that has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner will be R&D).
The report typically takes a few hours to put together, but you’re at the mercy of your client’s availability if further information or some clarity is required after the initial meeting(s).
Once the report is drafted, further time is spent collating and adding the relevant figures and qualifying costs to the report, as well as proofing it from a technical perspective, looking at the accounts and ensuring the qualifying costs have been treated correctly to allow a claim to be valid.
Multiply this time and effort by the number of claims some larger accountancy firms deal with and it’s clear these reporting rules will come at great cost to accountants.
Further requirements will also put an end to anonymous reports, as R&D advisers will need to put their names on claims, as evidence and accountability take centre stage in HMRC’s compliance efforts.