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?
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.
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.
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.
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.
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?
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.
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I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on areas such as R&D tax relief, Patent Box and Creative Industry reliefs, as well as IP tax issues more generally.
Formerly a Tax Partner with KPMG LLP (UK), I left in 2011 to establish Aiglon Consulting.