Written By Dominic Bonham.
Everything seems to be getting back to normal. Wembley is ready to accept 60,000 fans for the football, Love Islands back to consuming every corner of Twitter, and HMRC R&D Tax Inspectors (including 100 new recruits) have returned to their desks.
R&D Tax Credits have been on the up for the last decade; with the number of claiming companies and the respective sizes of their benefits increasing substantially. This aligns with the government targeting investment in R&D to grow to 2.4% of GDP by 2027, a target some research suggests we may well struggle to hit.
Ultimately the government has always believed in Britain’s ability to innovate our way out of any Brexit or Covid induced economic downturn. Thus, the government remains keen to fund it extensively.
Quantitative Easing and other fiscal stimuli have always faced “magic money tree” criticisms from certain corners, and it’s inevitable R&D will face the same from those unfamiliar with the criteria required for obtaining a tax credit.
Alas, the R&D Tax Credit Scheme isn’t magical, on the contrary, it’s quite long and technical. Any advisor worth their salt will be intimately familiar with BEIS Guidelines (about 12 pages of guidance) and HMRC’s CIRD manual (a lengthier 1000-page document). Whether it’s always received the respect it deserves from claimants is another point.
A balancing act: making sure that tax relief is being distributed for macroeconomic benefit rather than individualistic opportunism.
It hasn’t escaped the notice of the government that the number of claims, and the net amount distributed for the claim, continues to increase year in year. As long as this is well-targeted this isn’t problematic, and as previously discussed is in line with government policy objectives.
HMRC is however carrying out a review into the scheme to see whether it could be administered more effectively. One of the points covered in the review expressed this succinctly in its discussion of “Targeting of the reliefs, to ensure that for every pound of taxpayer support, we maximise the value of the beneficial R&D activity for the UK economy”.
As non-specialists and accountancy practices have noted the increasing rate of claims across the industry, more and more people are acting as R&D Tax Advisors, in our opinion often when they shouldn’t. This can lead to substandard claims slipping through the net if claims aren’t properly scrutinised.
Indeed it’s a lot easier for Harry Kane to score 20 goals a game if the opposition’s goalkeeper and defence have been taken off the pitch due to covid. Which is essentially what’s been happening. R&D Tax inspectors typically charged with enquiring into tax claims had been reallocated due to the pandemic. Typically to other more pressing areas, such as the Coronavirus Business Interruption Loan Scheme (CBILS).
In the words of Isaac Newton: for every action, there is an equal and opposite reaction. Previously reallocated investigators are returning to their desks with clawback targets in place. In response to the increased amount of claims, government audit records tell us that HMRC has also hired an additional 100 R&D Tax Inspectors to assist them.
So, why are they expanding? The answer is obvious: the amount of R&D claims has been growing at a faster rate than HMRC’s ability to scrutinise them. It appears that, in addressing that balance, HMRC will likely be taking aim at substandard claimant processes.
Why are we telling you this? Shouldn’t our job be to encourage claiming rather than scaring potential clients away?
To put it bluntly: we think it’s a good thing.
Enquiries : as long as there’s nothing to hide you’ve nothing to fear
It’s right for our clients to be security conscious, we wouldn’t want it any other way and it is a principle we share. We invest in our internal processes, not for profitability (more due diligence adds more expense to us after all), but so we can provide the most robust process possible. We believe that the industry should be more accountable and ideally regulated.
It’s not just about making sure that the work is correct. It’s about the way that you manage your supply chain, the way you frame your subcontracting arrangements, and the way you actively monitor R&D activities for future claims.
Hadee Engineering, a recent tribunal ruling regarding R&D Tax, has taught us (amongst several other points) that HMRC is entitled to ask more of their claimants when it comes to deducing the relationship between a taxpayer/potential claimants and its subcontractors for whom it wishes to claim against. It’s not your job to know that as a potential claimant, but it is the job of whoever is advising you to make you aware.
Make sure that your provider is properly equipped to represent you.
Questions you should be asking your current provider: