How is the market for research and development claims operating? Not too well, is the conclusion I’ve reached after extensive discussions with people in the industry.
I’ve looked at two main areas: how robust are the claims which are being made, and how well are advisers adhering to proper professional standards.
On the first point, I recognise that many firms, both R&D specialist boutiques and multi-disciplinary accountancy firms, are producing work of the highest quality. But I’ve also uncovered evidence that many claims are being submitted which are, to say the least, questionable. This covers not only situations where it is far from clear that any qualifying R&D is actually being carried out – pizza toppings anybody! – but also cases where there is probably some qualifying activity but where the claim is out of all proportion to the expenditure actually being incurred on R&D. Some advisers do seem to be prepared to throw the kitchen sink at claims by including costs which have nothing to do with R&D. Can the office receptionist really be carrying out R&D activity?
I have even greater concerns with the professional standards of some of those operating in this area. There seems to be a practice among some advisers not to allow the client to see, let alone approve, the R&D claim before it is submitted to HMRC. That cannot possibly be right. If a company does not know the basis on which a claim is made, in some cases not even being aware of what activity is being put forward as qualifying, something has gone seriously wrong. It leaves companies who are subject to enquiries from HMRC in the dark when it comes to responding, particularly if, as often seems to the case, the firm which has put in the claim offers no assistance. Spurious claims undermine the integrity of the system and risk discrediting the whole basis on which relief is give. That does nothing to support the genuine use of tax incentives to encourage R&D activity.
I have been told of cases where advisers are conscientiously applying the rules to ensure that only valid claims are made, only to then find themselves in conflict with their clients because another adviser has told the company, on very flimsy grounds, that it can put in much larger claims. There are some instances where the claim has been structured in order to generate the biggest fee for the adviser rather than to give the client the best outcome. Indeed, in some cases it appears that advisers either don’t understand the rules or are deliberately ignoring them in order to get the best result for themselves.
And what of HMRC? There is a perception among many advisers that the department is not as rigorous in examining R&D claims as it should be. Whether or not this is in fact true, this perception is widespread and it encourages some advisers to inflate claims and to see what they can get away with.
What can be done? Suggestions for change include limiting only approved agents to making claims, requiring personal certification of claims by a company’s competent professional, through to requiring companies to register R&D activity with HMRC before the work starts. None of these is ideal, but there is strong feeling within the R&D community that something needs to be done.
R&D is a valuable relief and it is right that advisers try to ensure that clients obtain the maximum benefit which is available. But there comes a point at which claims cease to have any legitimacy and become purely exploitative. Many people believe that we have already reached that point.
Andrew Hubbard, Tolley (‘Researching the researchers’, Taxation, 10 September 2020)
How is the market for research and development claims operating? Not too well, is the conclusion I’ve reached after extensive discussions with people in the industry.
I’ve looked at two main areas: how robust are the claims which are being made, and how well are advisers adhering to proper professional standards.
On the first point, I recognise that many firms, both R&D specialist boutiques and multi-disciplinary accountancy firms, are producing work of the highest quality. But I’ve also uncovered evidence that many claims are being submitted which are, to say the least, questionable. This covers not only situations where it is far from clear that any qualifying R&D is actually being carried out – pizza toppings anybody! – but also cases where there is probably some qualifying activity but where the claim is out of all proportion to the expenditure actually being incurred on R&D. Some advisers do seem to be prepared to throw the kitchen sink at claims by including costs which have nothing to do with R&D. Can the office receptionist really be carrying out R&D activity?
I have even greater concerns with the professional standards of some of those operating in this area. There seems to be a practice among some advisers not to allow the client to see, let alone approve, the R&D claim before it is submitted to HMRC. That cannot possibly be right. If a company does not know the basis on which a claim is made, in some cases not even being aware of what activity is being put forward as qualifying, something has gone seriously wrong. It leaves companies who are subject to enquiries from HMRC in the dark when it comes to responding, particularly if, as often seems to the case, the firm which has put in the claim offers no assistance. Spurious claims undermine the integrity of the system and risk discrediting the whole basis on which relief is give. That does nothing to support the genuine use of tax incentives to encourage R&D activity.
I have been told of cases where advisers are conscientiously applying the rules to ensure that only valid claims are made, only to then find themselves in conflict with their clients because another adviser has told the company, on very flimsy grounds, that it can put in much larger claims. There are some instances where the claim has been structured in order to generate the biggest fee for the adviser rather than to give the client the best outcome. Indeed, in some cases it appears that advisers either don’t understand the rules or are deliberately ignoring them in order to get the best result for themselves.
And what of HMRC? There is a perception among many advisers that the department is not as rigorous in examining R&D claims as it should be. Whether or not this is in fact true, this perception is widespread and it encourages some advisers to inflate claims and to see what they can get away with.
What can be done? Suggestions for change include limiting only approved agents to making claims, requiring personal certification of claims by a company’s competent professional, through to requiring companies to register R&D activity with HMRC before the work starts. None of these is ideal, but there is strong feeling within the R&D community that something needs to be done.
R&D is a valuable relief and it is right that advisers try to ensure that clients obtain the maximum benefit which is available. But there comes a point at which claims cease to have any legitimacy and become purely exploitative. Many people believe that we have already reached that point.
Andrew Hubbard, Tolley (‘Researching the researchers’, Taxation, 10 September 2020)
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