Specialist Tax Adviser Aiglon Consulting
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Dubious R&D claims brew hidden problems

David O’Keeffe asks whether some of the specialist firms that help prepare R&D claims are serving those clients well. And if not, what should be done?

9th Oct 2020
Specialist Tax Adviser Aiglon Consulting
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Unscrupulous advisers may be leading firms to submit dodgy R&D tax relief claims
iStock_Dodgy R&D_Wysiati

Research & development (R&D) tax relief has been a part of the UK corporation tax system for over 20 years and it looks like it is here to stay. Successive governments appear happy that it is delivering a good return to the economy in terms of increased R&D spend and businesses clearly like it.

Where there’s muck

Where a tax relief or incentive offers the potential of a generous cash credit - as with R&D - there will be a queue of people wanting to help taxpayers claim that relief. There is nothing wrong with that in principle. Tax is a complex area and it is only right that taxpayers are able to get professional advice and assistance.

The key word here is “professional”. Unfortunately, some of the firms springing up to give R&D tax relief assistance are far from professional in their behaviour.

Recently many accountants and tax advisers have voiced concerns about the standards of expertise and professionalism witnessed with R&D claims. These are my thoughts about what this all means, what is being done about it and what further action is needed.

Ethics and professionalism

This issue isn’t about professionally qualified versus unqualified. For me, the key issue is all about ethical versus unethical behaviour and both of those characteristics can be found in each camp.

Many specialist firms, along with general practice accountants and tax advisers, help companies submit claims for R&D tax relief. This is a good thing as the taxpayer deserves a genuine choice of adviser. The problem is that so many of these firms really don’t seem to be very knowledgeable about the legislation and practice governing R&D relief.

Ripe target

R&D is increasingly seen as an easy target for firms looking to make a quick and easy return. Many of these specialist firms have automated their processes so much that it’s “quick and easy” when it comes to preparing the claim.

Even their selling processes seem to be automated, guided by “simple questions” that inevitably suggest that you are undertaking R&D.

However, making an R&D tax claim is not simply a matter of filling in a form for a client and claiming a refund. The taxpayer is required to self-assess that it is undertaking qualifying R&D activity, and that it has incurred eligible expenditure in doing so. The comments of the first tier tribunal in the AHK Recruitment case are worth reading.

DIY claims

Some general practice accountants who, when they hear their client has been approached by an R&D specialist, immediately offer to do the R&D claim themselves.

Two questions I would strongly recommend companies ask of their accountant in this situation:

  • What’s your experience in this specialist field of taxation?
  • Why didn’t you mention this opportunity to us before?

One thing that always bothers me in these situations is how these generalist firms’ PI insurers feel about them doing this R&D work, when they probably don’t really have the knowledge and expertise to do it properly. Also, how does that sit with their obligations with regard to professional ethics?

What can be done?

The seven professional bodies that collectively developed Professional Conduct in Relation to Taxation (PCRT) recently published guidance on the application of PCRT rules to R&D tax work. I was involved with CIOT in developing that guidance.

This is great, but it is not enough. HMRC needs to step up to the plate as well.

Too many of these advisers, who don’t really understand the R&D relief, are getting away with poor knowledge and, in some cases, downright dishonest behaviour, because HMRC is not properly reviewing claims.

Too many obviously poor R&D claims are being allowed through without challenge, allowing those advisers to claim success and to continue to prepare poor quality claims.

Risk spreading

The repercussions of these bad practices are widespread.

  • The client company is at risk of making claims that may be open to successful challenge or may even be making claims that are lower than they should be.
  • HMRC is at risk of paying out too much in tax relief for activity that is not really R&D and does little for the economy.
  • Reputable advisers are faced with having to defend their perceived negativity and overly cautious approach in situations where they know the company is being led astray.

Honest approach

More than once I have explained to a prospective client that I don’t believe they are actually undertaking R&D, only to be told that I’m being “too cautious”, or “doing HMRC’s job for them”. This is because they’ve been approached by another firm that is confident they will have a big claim.

What is most galling is that this other firm will put together a claim and in all likelihood HMRC will not even look at it. The firm gets its fee, the client gets R&D relief and I get left looking foolish.

However, after that firm has submitted R&D claims for a few years and HMRC decides to have a look, where will this other firm be?

Solution

This problem will not go away on its own, these businesses will not suddenly develop a conscience and either move on or up their game. This is an issue of ethics and the professional bodies are at least doing something about it.

I would really like to see more involvement from HMRC.

Replies (9)

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By Justin Bryant
09th Oct 2020 15:14

Yes; as has been well document here & elsewhere the blame lies entirely with HMRC for not policing this properly. They seem to almost encourage (if not actively then passively) dodgy R&D claims as it makes the Government look good in having loads of R&D companies in the UK. Interesting to contrast to how HMRC ruthlessly persecute law-abiding EBT planning taxpayers and throw huge resources at that.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
09th Oct 2020 16:24

Justin Bryant wrote:

Interesting to contrast to how HMRC ruthlessly persecute law-abiding EBT planning taxpayers and throw huge resources at that.

It might have been interesting once. I suspect that most are tired of you grumbling on about it. It simply detracts from what would otherwise have been a valid and reasonable post.

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By ireallyshouldknowthisbut
09th Oct 2020 16:05

I agree with half of HMRC Justin says.

The half about the complete lack of any "on the ground" policing.

They need to investigate people. A lot. If they do that they will soon root out the rogue firms and shut 'em down in a matter of months which kills their business model, rather than finding out by random chance 4 years later the claim was dodgy and the firm long gone.

HMRC need good old fashioned regular compliance reviews. Its amazing that the vast majority of business will go their whole business life without as single compliance review. I have filed several thousand personal tax and company tax returns since we last had a compliance review other than for VAT. I think I have had 4 total in nearly 20 years. Crazy.

All the figures suggest money spent on tax investigations has a significant yield, but instead they seem enthralled by data and variances. Wendy's article earlier is thoroughly depressing.

https://www.accountingweb.co.uk/community/blogs/wendybradley/the-uk-tax-...

Its just so obvious you need to check peoples tax returns, and give them 'the fear' that next year might be their year to keep 'em clean and root out bad agents, and honest agents who make innocent mistakes but don't realise they are making mistakes as no-one is checking it.

If they move to pure "variances" then this opens up all sorts of bogus 'general claims' for costs not incurred, but the average business might which will never ever be found. They would be better off with a flat rate tax on turnover, at least it would be 'fair'.

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By Donald MacKenzie
12th Oct 2020 10:05

I had an electrician client tell me he had been approached by an "R&D consultant" who believed he could claim R&D Credits for them. Most of their work is new house installations. There is zero research or development, indeed they must follow procedures laid down by major housebuilder clients. My client was sceptical of the approach and agreed with me that they do not qualify. That does not mean the consultant would not have succeeded in getting R&FD credits as HMRC seems soft on spurious claims.

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Replying to Donald MacKenzie:
By jon_griffey
12th Oct 2020 10:12

The reality as everyone is fully aware except HMRC is if that R&D 'consultant' had filed a claim then it would have sailed through without HMRC batting an eyelid and your client could be £50K the richer, leaving you looking a chump.

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By petestar1969
12th Oct 2020 13:13

We tend to refer clients for R&D to a specialist firm but I have 2 examples of that not happening.

A managed IT services client was approached by, and used, an R&D firm who clearly wear ten gallon hats and spurs to the office, to make a claim for R&D over improvements to the management of their internal office procedures.

Their external bookkeeper told me about it and said she had reservations about it but they went ahead and did it anyway. Refund secured, for now....

The second one is a client who decided to make an R&D claim (because everyone is) and completely made up the amount of the claim and asked us to put it on their CT return. It wasn't up to me, I'm just an employee, but it went through.....

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By Graham Suggett
12th Oct 2020 13:29

Being former tax specialists with HMRC’s Incentives and Reliefs Team (which includes R&D and Creative Industries tax reliefs) and now working for ourselves (https://www.creativetaxreliefs.com/) it is hard to argue against anything that David has written.

The issues with R&D claims were obvious whilst we worked within HMRC. However, there was not always the resource or will to address them. HMRC did take on an additional 20 (or so) HOs to review R&D claims last year so hopefully, the situation will improve.

Working outside of HMRC, we now come across companies with unrealistic expectations as they have been poorly advised previously as to the requirements of the scheme and are unaware of the potential pitfalls.

Where we have been brought in to help with cases that have been selected by HMRC for enquiry it is often necessary to start at the beginning and lead them through the process to get to the correct position.

This has occurred where the accountant has advised their client (with the best of intentions) without having the necessary expertise or where a “specialist” agency has been taken on and their focus appears to be more on their own profit rather than serving their client well.

Ultimately, HMRC have to police the system effectively.

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By JD
12th Oct 2020 14:21

Agree with other posters.

I have had a clients use an apparently award winning firm of R & D specialist's and the clients all understood that the specialist's were pushing things rather to far, even if I was advising against it. Its like so many other things, complex rules, people not caring about taking the .... and total lack of simple, basic level controls.

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By whitevanman
14th Oct 2020 11:26

When R&D reliefs were introduced some 20 years ago, HMRC officers enquired into a large proportion and found that, almost all failed to satisfy the statutory criteria.
This was, however, a flagship policy and the chancellor had told everyone that he was giving away something like £800m.
Accountants and advisers complained bitterly that the relief was totally ineffective because it cost more to deal with HMRC than the claims were worth. Answer?
HMRC officers were told to stop looking at the claims!
Inevitably, the result was a proliferation of spurious claims. But all this was known about 20 years ago. There just hasn't been a political will to do anything about it. The approach was (and is) driven by politicians, not HMRC. The fact they are apparently now employing an extra 20 or so officers is just a sticking plaster. They will look at the more obvious, spurious, claims but that is all. Still, better than nothing.
The real problem is that there is very little (if any) evidence that UK Plc has benefitted from the £billions given away and of course, the stats to prove / disprove claims by either side, just aren't there.

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