HMRC’s shift in focus on R&D creates significant challenges for accountants

Data gathered by the specialists at Markel Tax has highlighted the changing HMRC approach to Research & Development (R&D) claims, and how its shift to focus on the technical justification of the R&D submission could pose challenges for accountants.

After a period in which HMRC channelled its resources into the fallout from the COVID-19 pandemic, it has now communicated its intent to examine R&D claims in further detail. A rapid recruitment process has allocated greater resources to the area with 100 new fulltime staff to work on R&D relief, looking to crack down on unsuitable claims made on behalf of businesses by sales-focused advisers.

While there is now a larger team specifically tasked with investigating the validity of R&D claims, it is also the shift in technical emphasis of a claim that will test accountants looking to ensure their clients receive the best possible advice.

Markel’s data shows that between 2020 and 2021, HMRC have increased the volume of its inquiries into R&D claims by around 450% year on year. This evidences a real move to reverse a noticeable trend in continuous growth in successful applications over the last few years through HMRC’s risk identification process. In fact, HMRC estimate the costs to the taxpayer due to Error & Fraud in the R&D tax sector to be of £469 million in 2022, a 40% increase compared to 2020 estimates.

The entry points HMRC are most commonly using to review R&D claims have not changed but the emphasis has shifted. R&D claims are generally based on two main pillars: cost analysis and the technical project description. According to Markel’s analysis, it’s the latter that HMRC are now looking to focus on. Inspections are now more closely examining whether a project is seeking to achieve a genuine advance in the fields of science or technology. This presupposes an understanding of the scientific or technological baseline in the sector. Without that, it’s very difficult to articulate any advances and leaves all but the most sophisticated R&D adviser without the appropriate expertise to properly assess a claim.

This is increasing the demand for R&D work for those with specific technical sector knowledge, given they are able to determine the baseline in the sector and what does and doesn’t qualify as R&D. The effect is that it de-risks the claim, and the right people claim the right amounts for the right activities.

The concern remains that if HMRC deem that the claim is false it is likely to investigate any or all other previous claims made by the company and potentially the accountant.

As its capabilities increase, HMRC have also changed the value of the claims they are willing to investigate. Historically, HMRC have been interested in R&D claims in excess of six figures. More recently, however, Markel Tax believes that HMRC are willing to pursue submissions of relatively small value. In fact, Markel Tax has dealt with a case valued at only £9,000, clearly demonstrating that HMRC only being interested in ‘big ticket items’ is no longer a safe assumption.

Accountants cannot afford to be reactive on R&D claims and the changing HMRC approach.

Waiting until a client approaches you with an R&D claim is not a position in which an accountant needs to find themselves.

Now is the time to be proactive and systematically review client portfolios. That way, potential opportunities for an R&D claim, and other tax reliefs, can be identified before a competitor takes control of the process.

HMRC’s changing approach does, however, leave accountants with a need to thoroughly assess their R&D adviser by looking at track records and the quality and quantity of technical experts able to properly assess what are usually complex technical developments.

The Markel Tax team is made up of over 30 highly experienced consultants and finance professionals. They work closely with accountancy clients to support their efforts in the face of rising HMRC investigations and questions around R&D claims submitted on behalf of clients. The need for expertise has never been greater and the renewed emphasis which has been placed on erroneous R&D claims looks set to only increase.