.png)
.png)
Key points
- Claims for research and development will require more detail.
- Preparation and good communication will be key.
- Accountants, even those who routinely supply basic background information, face a steep increase in workload.
- HMRC is putting evidence and accountability at the leading edge of its compliance efforts.
It is common knowledge that HMRC is clamping down on abuses of research and development (R&D) tax reliefs, but one game-changing measure has so far gone largely unnoticed.
HMRC’s report of 30 November 2021 (tinyurl.com/hmrcrdrep) indicated that ‘these claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome’.
This will be the first time that HMRC has insisted on extensive submissions to back up claims. It is all part of the department’s drive to rid the accountancy and consultancy sector of rogue operators.
There is currently no prescribed way of submitting a claim for R&D tax credits, beyond the essential numbers. It is possible for accountants to enter those figures on the CT600 without any supporting evidence describing what that client has actually been doing.
The fact that staff costs make up the bulk of a typical claim makes this easy to do. However, it was never without risk, in particular for smaller clients, because the ‘competent professionals’ whose testimony is crucial to substantiating claims in writing could move on or retire by the time an enquiry was started. These accountants would simply have satisfied themselves that, if challenged, the information was readily available and could be provided.
This was well within the rules. However, legitimate tax relief consultancies operating at arm’s length to accountancy firms have never operated like this. They are known for producing extensive reports that supply all the background to a claim in detail. Not only that, but the reports also explain how the qualifying costs interact with the legislation.
More detailed explanations
This is the direction HMRC now wants to move in for all claims from April 2023. Its aim is to weed out those that have no legitimate basis and, by virtue of demanding more detailed explanations, encourage claimants and their agents to remove projects and costs that do not actually qualify.
This is going to have big consequences for accountants because it is going to place huge demands on their time. Why? Every one of these reports takes days to prepare, usually stretched out over the course of a month.
A robust claims report, of the kind HMRC is used to receiving from R&D consultants, could run to many pages of detail. This is why accountants, even those who routinely supply basic background information, face a steep increase in workload. Their understanding of the legislation will be tested and all this is going to add considerable overhead. Fixed fees or hourly charges charged for this work in the past may prove inadequate.
Time-consuming exercise
The claims report process begins with client interviews that are ideally conducted face to face. Not everyone the adviser needs to speak to is necessarily going to be available when needed, so this process can last a few weeks. The longest amount of time we have spent on a single R&D claim report was 12 months – this was because the company struggled to find the time to supply the right information to perform the tax calculations. This was an extreme case, but the bigger the company and the bigger the claim, the more likely it is that accountants will encounter delays. Preparation and good communication are going to be key.
Having spent at least half a day meeting and interviewing the client and their competent professionals, of which there can be more than one, the information is shaped into a report. This report is careful to link the detailed descriptions of qualifying activity to the legislation, HMRC manuals and Department for Business, Energy and Industrial Strategy (BEIS) guidelines.
For example, there are four different types of advance that a project might have, in accordance with the BEIS guidelines. Section 9 in the guidelines sets out the advances as:
- extend overall knowledge or capability in a field of science or technology; or
- create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
- make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
- use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (eg a product that has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner), will therefore be R&D.
The report typically takes a few hours to put together but, again, the adviser is at the mercy of the client’s schedule and they may need to be guided on what is required.
Once the report is drafted, further time is spent collating the relevant figures and qualifying costs to the report, as well as proofing it from a technical perspective, looking at the accounts and ensuring the qualifying costs have been treated correctly to allow a claim to be valid.
Multiply this time and effort by the number of claims some larger accountancy firms deal with and it is clear accountants have a mountain to climb that was not there before.
Coupled with a further requirement that research and development advisers will have to put their name to claims, bringing an end to anonymous reports, HMRC is putting evidence and accountability at the leading edge of its compliance efforts.
