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R&D tax relief is by far the most attractive form of corporation tax relief available to UK companies. It is aimed at rewarding UK companies for investing in innovation and is an extremely valuable source of funding for businesses, resulting in a cash benefit either in the form of a reduced corporation tax liability, or a payable tax credit for loss-making companies.
Under this initiative, when an SME incurs expenditure on qualifying R&D, it can receive tax relief at up to 230%. So, if the Company spends £100,000 on qualifying R&D, it can get a deduction of £230,000 against its tax bill. If it is making a loss, then that loss can be ‘sold back’ to HMRC for 14.5%.
There is also a similar but separate regime for large companies.
According to recent statistics, the R&D relief currently costs the Treasury circa £3.5bn a year.
If the Company spends £100,000 on qualifying R&D, it can get a deduction of £230,000 against its tax bill
What are the concerns?
Where a tax relief offers the potential of generous tax savings, such as with R&D, this will lead to people wanting to assist taxpayers claim that relief. As a matter of principle, there is nothing wrong with this as tax is a complex area and it is only fair that taxpayers are able to get the right professional assistance.
Statistics show that R&D tax relief is quite often overlooked by companies and their advisers, predominantly due to a lack of awareness of what constitutes R&D expenditure, resulting in companies missing out on substantial claims. On the other hand, recently a large number of accountants and tax advisers have voiced concerns about the standards of professionalism within the R&D market, which are explained below.
Do the activities really qualify as R&D?
The first area of concern is that many of the so-called R&D firms do not seem to be very knowledgeable about the R&D legislation. As such, claims are being submitted for expenditure that simply does not meet the criteria or qualifying R&D expenditure.
Given the nature of R&D, it is possible for two advisers to disagree over whether the same expenditure qualifies as R&D or not. However, the concern here is in relation to claims for expenditure where there simply cannot be a rational argument for R&D, leading to a large number of dubious claims.
The second area of concern relates to the quantum of claims being put in and the R&D fees associated with such claims. There appear to be numerous cases where the claims are significantly out of proportion compared to the R&D qualifying expenditure. This can include instances where salary costs for employees who have no involvement in the R&D project are included in the claim.
There appears to be real concern that some ‘advisers’ are prepared to take the risk by inflating R&D claims, hoping that HMRC will not challenge the claim. The primary reason for this appears to be that most firms would charge clients based on a proportion of the R&D claim.
Many of the so-called R&D firms do not seem to be very knowledgeable about the R&D legislation
Another worrying aspect is that there are often cases where there is minimal (if any) involvement by the company itself in making the R&D claim. In fact, some firms are putting in claims without having any sort of approval from the company. To make matters worse, some firms lock clients into long term contracts. With fees based on a proportion of an inflated R&D claim with the client’s engagement being guaranteed for a number of years, this presents a lucrative opportunity which some rogue R&D firms seem to be benefiting from.
Is HMRC doing enough?
There appears to be a clear perception amongst reputable advisers that HMRC’s R&D department is not as rigorous in examining R&D claims as it should be, resulting in a large number of firms putting in inflated claims without being questioned. Therefore, too many advisers who do not understand the mechanics of R&D relief properly are getting away with insufficient knowledge and as such, a lot of ‘poor’ claims are being accepted without challenge.
What is the solution?
There seems to be a genuine concern that the way some R&D advisers are operating needs to be reviewed. If businesses are encouraged to make R&D claims that have little justification, it can significantly undermine the work of firms who are aiming to provide good quality fair advice.
R&D tax relief is a key incentive that the government gives to UK businesses and it is important to the economy that this incentive continues to be provided to innovative businesses. However, it is also crucial that the R&D marketplace operates in a fair and ethical manner in order to help businesses benefit from the right level of claims. Perhaps it is about time that the surprisingly ‘light touch’ approach adopted by HMRC to R&D claims is changed and thorough review processes are put in place.
At ETC Tax, our R&D experts can help assess your company’s activities to maximise R&D tax relief opportunities in line with the legislation and HMRC guidelines. We can manage your R&D claim from start to finish, allowing you to focus on managing your business. We strongly believe that you should not have to pay money for old rope and as such, we operate a fair fee structure and provide ongoing advisory support in relation to your R&D affairs without signing you up for long term contracts.
Our R&D experts can help assess your company’s activities to maximise R&D tax relief opportunities