R&D tax reliefs – are poorly prepared claims tipping the balance from reward to risk?
During the last 6 months there have been a number of developments which affect the preparation of R&D claims and how companies should view their claims.
Put simply, R&D claims are a key measure for rewarding innovation in science or technology by UK companies. However, due to the entry into the R&D tax relief claims market of a range of claims advisers who have a more aggressive approach to claims, the National Audit Office now view “poor quality R&D claims” as being the fastest increasing area of tax risk to the Exchequer.
The National Audit Office have made a series of recommendations to HMRC in relation to improving the quality control for R&D claims. As a consequence, we would recommend companies make sure that they are not caught out if HMRC increase their scrutiny of R&D claims as the Treasury seeks to recover some of the sums which have been provided to businesses during COVID-19.
In a series of articles this week, Hollie Thompson will discuss the following four areas where themes around R&D claims have changed in the last six months:
|What has changed?||Who does it impact?||What is the takeaway point?|
|HMRC recently won a tax tribunal which overturned an entire R&D claim in a software business because they didn’t think the claim proved any advance in science or technology.||Any company making a R&D claim.||HMRC are able to expect the R&D claim to be able to evidence what has been considered in terms of the “’state of the art’. The case shows who a tax tribunal really expect to be able to put forward the case regarding what the R&D actually did to advance science or technology (hint – they didn’t want to hear from the tax adviser at the R&D claims boutique).|
|The ICAEW and CIOT have deemed R&D claims to be “accountancy services” for anti money laundering regulation purposes and have introduced special rules for R&D claims under Professional Conduct in Relation to Taxation (“PCRT”).||Any company making a R&D claim.||As part of any engagement process – you should check that your R&D claims adviser is regulated by HMRC for anti money laundering purposes and is governed by PCRT. By checking both are in place, you have more comfort that appropriate quality control is being applied.|
|The COVID-19 measures provided by the Government impact upon R&D claims.||Any company making a R&D claim and receiving R&D tax reliefs or credits.||Some of the COVID-19 support measures will simply reduce your claim as the costs you can claim will be reduced. Others can be classified as state aid and so can change the rate of a claim. Do you know which measures you have claimed and the impact on your R&D claims?|
|The Government is proposing to add certain software related costs to qualifying expenditure.||Companies whose R&D includes cloud, data or other software costs.||An ongoing consultation process could enable you to help ensure that costs you incur on cloud or data costs are able to be claimed where they are part of a R&D project. HMRC want businesses to provide feedback on their proposed changes.|
There is a clear move by the NAO, the judiciary and also the accountancy industry to ensure that quality control for R&D claims is improved. R&D claims are a key measure to support businesses at the current time and the support should be received by the businesses that have invested in what is accurately classified to be R&D.
Companies who are making R&D claims should ensure that their R&D claims meet the level of evidence which the recent tax case has set down as being required to be met, and should work with PCRT regulated advisers who can help them achieve high quality R&D claims.
R&D blog series from Hollie Thompson
Episode 1 – Not all R&D is qualifying R&D
Episode 2 – Why use an accountant for your R&D claims?
Episode 3 – The impact of the Coronavirus Job Retention Scheme on R&D
Episode 4 – Consultation on data and cloud computing – qualifying expenditures for R&D tax credits