The scheme is very much alive, but requires a more dynamic advisory skillset
Recent news reports about fraud in R&D tax relief, coupled with ongoing vexed debates in the industry about HMRC’s compliance checks, may leave some companies feeling more wary of applying for Research and Development tax relief. That fear factor has led a few accountants and advisors to back away from the relief, in turn prompting some taxpayers to wonder if the scheme’s days are numbered.
Well, no. They are not. The important thing to say up-front is that if a UK company is doing legitimate R&D, they have as much recourse to the relief today as they always did and there is no elevated inherent risk. R&D remains an important tool in the UK government’s overall innovation incentive kit and there are no plans to retire it.
What changed, then?
While the schemes for SMEs and larger entities have merged (for accounting periods beginning on or after 1 April 2024), lowering the rate of return for SMEs, the underlying legislation has not narrowed or diminished in scope. Indeed, it has been expanded. The scope for an advance in science or technology has widened slightly (to include pure mathematics and cloud computing costs, for example) and allowable costs have increased in scope. HMRC has also issued helpful guidance for compliance, with examples of qualifying and non-qualifying scenarios that build upon those already in the guidelines.
Meanwhile, a mounting body of case law at the First Tier Tribunal now acts to clarify points of historic contention around, for example, the definition of the “competent professional”, the meaning of “subcontracted” versus “subsidised” work, who should carry the burden of proof in case of a dispute and what may or may not constitute a technological uncertainty.
So for those of us who live and breathe R&D tax, the air is actually much clearer than it was just two or three years ago.
So why the bad press?
The market for R&D tax credits as a standalone vehicle grew very rapidly, fuelled in part by some irresponsible advertising. In this context, HMRC was determined to root out what it suspected was widespread error (and fraud) in the scheme. To do so, it significantly upscaled its compliance checks to take both a random and a volumetric approach. This raised the likelihood of attracting an HMRC “enquiry”, from about 1% of claims to around 20% at the height of the volumetric operation.
This volume compliance approach resulted in some fraudulent advisors being rightly exposed and taken out of operation. This was a good thing for the scheme, as it made sure that those who had no business applying for R&D relief – such as care homes – would not muddy the waters or diminish the return for those who did.
However, HMRC’s volumetric compliance probes were carried out by hurriedly-recruited case workers, whose conclusions often fell short of what seemed just and fair. Contesting these perplexing decisions tested the skill sets of advisors to the limits.
Some advisors discovered that, while they understood the statute, they simply did not have the multidisciplinary skill sets on board to troubleshoot and mount robust defences of their valid claims, when they were being critiqued in minute detail, often incorrectly, at the technological level. Mounting a successful defence could often mean arguing very nuanced points in data architecture or engineering processes and representing these complex ideas in plain language that case workers could understand.
This resulted in some advisors backing away from the relief and some of the country’s most worthy innovators losing out on their relief, simply because they lacked the resources and skills to keep fighting HMRC staff that seemed not to understand them or their work.
How we are different
Our skillset
Firstly, we do understand your work. We’ve made it our business to recruit and develop a truly multidisciplinary team. Our people include not only regulated tax advisors, accountants, mathematicians and economists, to ensure your research and development investment goes as far as it can for you, but also scientists, engineers and technological communicators, who ensure we represent your innovations accurately and robustly to HMRC.
Our attitude
From the outset we have taken a proactive approach with HMRC itself. We’ve met in person with both operational and policy leaders at HMRC, at a time when many advisors were sinking under the weight of endless letter correspondence. We continue to pioneer and lobby for a more collaborative approach. This two-pronged approach has resulted in recent commendations on the quality of our work from HMRC mediators and litigators. It has also meant fewer compliance actions opened into our claims and a more rapid and satisfactory closure for those few that are queried.
That is why our appetite to represent your work is not diminished in the least. When you talk to us, we’ll pair you with both a relevant technical advisor and a tax advisor and we’ll make a plan that includes support for your claims in the event of HMRC enquiries.
Our skillset and attitude mean you are in safe hands working with us. Let’s Talk
