Research and development (R&D) tax credits are the Government’s incentive for rewarding companies who invest in innovation and are a valuable source of cash. However, the risk is increasing for companies who get their R&D claims wrong, and all claimants, even those who have historically claimed, are subject to increased HMRC rigour.
To help clients and provide a new approach to R&D that meets the emerging demands of recent changes, Foxley Kingham is working with Giordano Goggioli, Senior Associate for Tax Incentives and Reliefs, who is a specialist in R&D tax credits at Markel Tax. The result is a helpful Buyer’s Guide on what companies should look for when sourcing an R&D agent.
It’s more important than ever that firms deal only with reputable R&D tax agents to help make correct applications for tax credits and protect them from future HMRC penalties.
Risk of error and fraud
HMRC, via their House of Commons Committee of Public Accounts, has conceded that they do not know why R&D claims are up 240% over the last four years, with claims far exceeding forecasts. As such, there are now plans to increase resources to scrutinise claims. The “level of error and fraud” appears to be significant and therefore the potential risk for companies that their submissions are far more likely to be audited is much higher than in previous years.
Up to 70% of all historical claims can be recouped
If a company is audited by HMRC and it is found their R&D tax credit claims are deliberate and concealed, they can be made to pay up to 100% of the funds back, including monies for claims made in all previous years where the incorrect treatment of R&D expenditure. In addition, up to 70% of the claim value could be payable in fines and penalties!
Since the average R&D claim for an SME is approximately £57,000 per year, this is a sizeable penalty.
Are you doing your R&D claims right?
Since the narrative of recent years has been to encourage companies to submit R&D tax credits to access this injection of much-needed cash, there have been an increased number of claims to HMRC, many of which are thought to be fraudulent or incorrect.
Unregulated R&D agents
Companies should know that the R&D tax advisory industry is completely unregulated. And, because the HMRC criteria for R&D are purposefully broad, the risk to companies using self-appointed, less qualified R&D agents, and submitting incorrect applications is a real issue.
Here is your Buyer’s Guide to help you in your decision-making when it comes to choosing and appointing an R&D agent.
Your Buyer’s Guide
1. Assess your R&D tax advisor
Anyone can set themselves up as an R&D tax advisor, so it’s vital that you self-assess them to determine whether they have the right credentials, experience and expertise.
R&D tax relief is a multi-disciplinary field so you’ll need a comprehensive ‘helicopter view’ of the R&D tax advisory firm, in the following areas of expertise:
a. Tax or accountancy experience
They must have accountancy experience and qualifications. Look at the credentials of the firm and satisfy yourself that, first and foremost they are bona fide accountants or chartered tax advisers, worthy and capable of handling your company’s financial affairs.
b. HMRC capability
HMRC are the ultimate decisionmaker; the ones who will judge your application and potentially audit your claim. Ideally, firms may have HMRC expertise in-house, often former R&D tax inspectors.
c. Sector understanding
Does the advisor have people who understand the science and technology of your sector? This can be hard for an accountancy firm alone to provide since they are unlikely to recruit a specialist for every sector. There is a level of judgement in assessing whether there is genuine innovation and grounds for a claim, but a specialist is required in order to understand where the baseline technology is in your specific sector. It is fundamental to ascertain whether you’ve sought to make an advance in science or technology in the projects you have historically or are currently working on.
2. Examine the contractual payment terms
Certain contract behaviours can signal a red flag when it comes to disreputable R&D advisors and their firms. For example, a reputable firm should not and will not ask for any up-front costs and will only request payment when your claim is successful. You should look to engage with a firm that wants to build long-term relationships with you, based on the quality of their work and your satisfaction with their services.
Examine the contract carefully and watch out for these potential warning signs:
a. Up-front payment
Up-front payments are a big red flag, as well as asking for payment when the claim is submitted, as opposed to when it is processed by HMRC.
b. Discounts for rolling, or multi-year contracts
This could be a trap, designed to make it difficult for you to leave the contractual relationship. Auto-renew contracts are fine, just make sure you can leave them at any time without penalty.
c. How is the fee calculated?
It’s standard for the fee to be calculated as a percentage of the tax benefit you receive. However, some companies might charge a percentage of your R&D expenditure, so they can state a smaller percentage. Since your expenditure is bigger than the benefit you’ll receive, at first glance, this looks like a cheaper fee. Seek clarity on what you’re paying for, and make sure it relates to the percentage of benefit you receive – this is the clearest way to understand the fees you will pay.
d. Defence is included
It’s standard practice for reputable firms to include any future defence needed in an HMRC enquiry, within their fee. Make sure the firm you work with is obliged to defend what they submit, and will not charge you extra for defence work. They should be happy and confident to defend their work.
3. Checking what happens after you buy
Aim to establish the process, and what happens, after you appoint the agent, in other words, check the claiming process. Check you are comfortable with all aspects and that it has your best interests at heart. Here are the main things to investigate:
a. Check they show you the actual R&D tax relief claim
Before the claim gets submitted, you need to see it. As a Director of your business, you file your tax return on a self-assessment basis, meaning you are ultimately liable for the accuracy of the information you present to HMRC. Believe it or not, some firms claim their work on your behalf is their intellectual property and may refuse you the sight of the technical report. You should insist that you have access to the report, you need to be validating the accuracy of the content prior to submission to ensure it represents a true reflection of the project work and costs incurred.
b. Check the process for sharing the submission with you
You need to have time to give input and suggest revisions. There are flags to watch out for that can indicate a poor claim – another good reason why you shouldn’t be asked for payment before the claim is successful.
- Is it excessively verbose and inflated?
- Is there a repetitive use of highbrow words to make it sound impressive?
- Is the scientific baseline adequately established?
- Is the technological or scientific advance adequately explained?
- Are the project’s timeframes specific? If timeframes are approximate this is a red flag for a risky submission.
4. Do your homework and work with an expert
Remember, in the future, HMRC may challenge your claim, and those of previous years, so it’s best to do your homework and always work with an expert, that way, you will be covered and have all the evidence in place for your defence, should you need it.
Do it right, from the beginning
Working with the right agent, who can support you, who stands by their work and is liable for their own defence, is essential for all companies submitting R&D tax relief claims.
While poor behaviours around claiming R&D credits have existed for some time, it’s unlikely they will be able to continue largely unchecked by HMRC, so make sure you do it right from the beginning.
This Buyer’s Guide will help you, but if you need further advice, please don’t hesitate to contact us for a chat.