Specialist Tax Adviser Aiglon Consulting
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Bike sheds and other ridiculous R&D claims

David O’Keeffe is incensed by claims in a trade journal which said construction firms are in line for a “£50m Covid dividend in R&D tax rebates”, for refitting offices as bike sheds, among other things.
26th Feb 2021
Specialist Tax Adviser Aiglon Consulting
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Bike shed
istock_Bike-shed_Roger-Mechan

I’ve written before on problems with poor standards in some parts of the R&D industry, but this particular article made my blood boil. It is likely to grab attention of builders and, no doubt, get clients emailing their accountant to check that they are in line for some of this £50m.

What is R&D?

There is definitely R&D in the construction industry and there may even be R&D that is directly related to the Covid pandemic. It’s just not as simple as the headline makes out.

According to the trade journal, R&D is “anything from converting office ground floors for bike storage in response to a modal transport shift to setting aside dedicated first-floor meeting space to limit visitor movement around buildings”.

It’s true that the meaning of ‘R&D’ for tax purposes is broader than many people realise, but it really is not that generous. Also it’s certainly not in simply converting parking garages into bike sheds!

Law and guidance

R&D for these purposes is defined in CTA 2010, S1138. The regulations referred to in subsections (3) and (4) are the Guidelines on the Meaning of Research and Development for Tax Purposes. There’s a lot of information in these guidelines but the key points are that for R&D to qualify for enhanced tax relief there needs to be:

  • An attempt to achieve an advance (in knowledge or capability) in a field of science or technology
  • Through the resolution of scientific or technological uncertainty

It might be the case that “reworking sites to keep them operational during the pandemic” and introducing “new safety measures and processes to ensure safe working” could involve some innovative thinking, but I seriously doubt that converting office ground floors for bike storage or setting aside dedicated meeting space are going to come anywhere close to being R&D.

I clearly don’t have all of the facts behind these examples, they may well have been oversimplified for the purposes of the article but it doesn’t change the fact that statements like these are, at best, misleading.

More nonsense

This bike shed claim isn’t the most extreme of the ridiculous claims that I’ve seen published. One of my favourites is:

“We worked with a call centre where the manager would record the telephone conversations between the customer and the agent, and then sit down with them afterwards and go over what they did well and badly – this counted as R&D.”

It really is no wonder that R&D tax advisers as a whole are getting criticised, both by others in the tax profession and by HMRC. Whilst I believe that this sort of approach to an important tax incentive is not reflective of the sector as a whole, poor practice must be called out.

Cowboys

Providing R&D tax claim services is increasingly seen by some as easy money, with new firms setting up almost daily. The reality is that many of these firms have little or no understanding of the legislation behind the UK’s R&D reliefs.

I wouldn’t be surprised if many haven’t even attempted to read the legislation, yet they profess to being ‘experts’ and/or ‘specialists’. They market their services with unsupportable and often meaningless claims such as:

  • ‘approved methodology’ – approved by who, certainly not HMRC (as implied);
  • ‘lowest enquiry rate in the industry’ – to be honest, I’m not aware that anyone (other than maybe, HMRC) keeps such records; and, of course
  • ‘100% success rate’ – where to start with this classic!

Real harm

The problem is that the examples quoted in these articles aren’t just fictitious scenarios, it is likely that these firms will actually have submitted claims based on those activities. That the examples are now being published suggests that those claims were ‘successful’.

Now here is the real nub of the problem, the firms making these claims probably think that their R&D claim has been ‘accepted’ or ‘approved’ by HMRC because it has been processed without question.

Unfortunately, they don’t seem to understand that HMRC operates self-assessment on a ‘process now, check later’ basis. Lack of resources at HMRC means that very many claims are ‘processed now’ without any real checks at that stage. Of course, in the future when HMRC does come calling, where will that adviser be?

Is regulation needed?

I have long believed that it is too late now to regulate the use of terms like ‘accountant’ and ‘tax adviser’, there are a lot of very good ‘accountants’ and ‘tax advisers’ who have not passed professional exams.

However, articles like the one in the trade journal, along with my first-hand experience of some claims that have been prepared by such firms really do make me question this position.

Replies (7)

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By ireallyshouldknowthisbut
26th Feb 2021 16:32

The whole R&D tax credits system is ripe for abolition.

It seem to be totalling unfit for purpose with chancellor after chancellor liking to make a big announcements of spending on R&D whilst actually just funding ludicrous claims.

I have made a number of proper claims for client, and not one of them did the R&D due to the tax credit. it was jut a bit of free money we for them. Well apart from a client who wrote computer games who's profit was so thin it was required. But in effect it just subsidised the main publisher who makes telephone money level profits.

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Replying to ireallyshouldknowthisbut:
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By Jdopus
02nd Mar 2021 12:13

I don't agree and I think it's easy to undersell the attractiveness of R&D tax credits. I have a client who completely shifted the research branch of quite a successful company from Dubai to the UK solely to take advantage of the R&D scheme, still in process but we're probably looking at about ten specialist jobs total moving over once all is said and done.

I know of plenty of others who have chosen to base their company in Northern Ireland rather than the Republic of Ireland solely because of the UK's more generous R&D and capital allowance reliefs to incentivize investment. These are just cases I'm personally aware of.

To be blunt, the current system isn't at fault, the problem here is that there is absolutely zero enforcement of the existing rules. I have been submitting R&D claims for years and have only ever had HMRC ask a single question about the information I have submitted. HMRC's neglect of enforcement in this sector has birthed an entire sub-industry of people who directly profit from having learned about this extremely obvious HMRC blind spot.

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By petestar1969
01st Mar 2021 10:42

Years ago, when there was a de-minimus on R&D claims, a client decided to leave my firm as we had not claimed for what she believed was R&D.

She was a psychologist and had a bought a book for £20 to improve her ability to do her job.

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@enanen
By enanen
01st Mar 2021 11:26

Now when I get calls from clients who have been contacted by claims companies I just send the client the HMRC link and ask them to explain to me their innovation.

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By giles
01st Mar 2021 13:38

I would love to know your comments on this:

‘100% success rate’ – where to start with this classic!

(as this is what often clinches the sale - who can resist when the salesman assures that success is assured whatever the claim and however large the amount)

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By indomitable
01st Mar 2021 14:36

Agree with almost everything in this article and have long been of the view that the term 'accountant' or 'tax advisor' needs to be legally protected like 'solicitor'. This needs better lobbying by the professional bodies.

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By cfield
02nd Mar 2021 09:06

It's a shame that R&D has never been subject to the same level of attack by left-wing politicians as ER, which they've had to re-name Business Asset Disposal Relief because the word Entrepreneur has become so toxic. It seems that it's OK to constantly complain and nag the Chancellor about a little bit of tax relief on the retirement nest-eggs of millions of self-employed people (although they are still taxing them of course) but the R&D tax credit giveaway gets a free pass just because of the word R&D. What's in a name, eh? Who wants to be seen attacking innovation?

The solution I think is to take it out of Self Assessment and turn them into claims that need to be manually processed and approved as cash rebates. Unfortunately, HMRC insist on letting their IT systems do all the work, after programming them very badly. Doesn't matter whether it's an illegal penalty, an incorrect tax code or an absurd R&D claim, just let the computer do what it will and brush it under the carpet. It's far too much effort to fix the system or get human beings involved.

That being so, it should be taken out of the hands of HMRC altogether. Everyone knows that the whole organisation is totally unfit for purpose. It can't even do its core activity properly, let alone specialist stuff like this. Trouble is, they'd only outsource it to the private sector instead, so we'll just end up paying through the nose for an even bigger shambles.

Here's an idea. Why not let scientists manage it rather than civil servants? People who actually understand what research and development is. The universities badly need more funding, so take it away from HMRC and let them do it, rather than just dishing out more public money for no return.

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