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Beware of new red flags in Your R&D Claims

24th May 2024
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R&D tax relief training and support

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R&D tax relief has seen lots of change recently, including the introduction of new Schemes. What new red flags do R&D advisors need to look out for?

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You may remember that, a couple of years ago, HMRC undertook a major project of randomized compliance checks (the “Mandatory Random Enquiry Programme (MREP)”) to try and uncover the scale of error and fraud in the R&D tax relief scheme.

Word spread across the industry that enquiries were now random and unavoidable, and for many, it stills feels that way. There have even been cases reported in the mainstream press recently where small businesses have been asked to repay tax relief for R&D projects they felt were legitimate.

So, as an advisor, there’s not much you can do about it, right? Best to keep your head down, cross your fingers, and hope the baleful eye of HMRC lands on someone else.

Or perhaps not! The randomised enquiry project gave HMRC a lot of data about where it should be focusing its compliance efforts. For example, small claims from advisors that are unaffiliated with a professional body seem to have attracted a lot of attention.

But even if this sounds like your claims, there’s a lot you can do to minimise your risk. We know this because in addition to providing R&D training, we also support our members with enquiries, and we’ve seen some consistent patterns in what seems to trigger a compliance check from HMRC.

Some of these are the same as they have been for many years, but there are some new ones you need to be aware of.

HMRC targets claims within certain industries

One of the key elements of HMRC’s new approach to compliance is to target claims based on the industry of the claimant – usually by looking at their SIC code. In theory, R&D tax relief claims could be found within any industry. All that’s needed is a technological advance in science and technology. Sounds pretty broad, right? Surely most industries in the modern world incorporate “science and technology.” 

In reality, HMRC keeps a watchful eye out for claims made in certain industries. These are either:

  • Industries that suffered from widespread misunderstandings about what was eligible (like the construction and software sectors, in which lots of routine work was classed as R&D), or;
  • Industries that were targeted by rogue consultants, such as care homes, nail bars and hospitality businesses.

This 2023 report published by HMRC gives you a rough idea of the relative sizes of each industry in R&D tax relief terms. But it’s not so cut and dry as a bigger industry equals a safer claim; you’ll see that Construction accounts for a huge portion of R&D tax relief expenditure. Similarly, smaller industries like Biotech are regarded as low-risk by HMRC, and they don’t see quite as much scrutiny. 

There’s no hard-and-fast guide published by HMRC that lets you know which industries they consider high and low risk, but that’s where the knowledge and experiences of your professional network can really come into play.

All that isn’t to say that a claim can’t be made within a risky industry. You just need to be sure that the project details, technological advance, and especially the named Competent professional are well defined and clearly presented. 

Clients must understand new guidelines

The other issue we’re frequently seeing is that claimants are not providing strong, detailed answers about the most important technical aspects of the claim – the baseline, the advance, and the uncertainties. 

In some cases, this is because they don’t have a Competent Professional in the relevant field, as we’ve described above. But in others, the issue is that the Competent Professional doesn’t really understand what’s required in order to qualify for R&D tax relief. Often, companies expect their advisor to do all the thinking and tell them what’s eligible for relief. Many still don’t realise that the responsibility for a claim has always been the company’s, not the advisor’s. 

Realising this, HMRC published its Guidelines for Compliance 3 (GfC3) in October 2023 to give more information about how companies should work with their advisors in practice. 

The good news is that the GfC3 are the clearest and most useful set of explanatory guidelines for the scheme published to date. It’s clear that HMRC want claimants to be aware of their responsibilities and understand why their project qualifies for relief, rather than solely relying on their advisor.

For example, they need to provide evidence that they researched the industry baseline in detail and why they were reasonably sure there was no existing technology available that could resolve their problem. They can’t just come to you, their advisor, after the fact and say they didn’t think there was anything available. That won’t hold water with HMRC.

In the GfC3 you can even find examples of what HMRC would regard as qualifying R&D. You can use these in discussions with your clients and to respond to HMRC during an enquiry. 

If you can’t persuade your client to engage with their claim at that level of detail, that’s a major red flag for you. While HMRC won’t witness your client conversations, they will certainly see the project details you submit in the Additional Information Form (‘AIF’). If your client hasn’t taken responsibility for their claim, or given you the level of detail and evidence needed, there’s a significant risk that HMRC will spot the holes in the case you’ve tried to make on your client’s behalf.

Need help spotting red flags in your claims?

While these are the newest red flags that R&D advisors need to be aware of, there are plenty of other issues which could be triggering compliance checks for your clients. If you want a practical tool for identifying and fixing those issues, you can download our free Red Flag Checklist to start tackling them right away.