HMRC recently reported on the outcome of a first tier tax tribunal case investigation into an R&D tax claim.
What happened during the investigation?
In this case AHK Recruitment Limited worked with Optimal Compliance to compile an R&D claim for an internal software project. HMRC opened an enquiry to understand how the project qualified as R&D in line with the legislation. After months and months of delays following HMRC requests for evidence Optimal, on behalf of AHK, could not produce sufficient evidence around the projects and critically could not produce a competent professional at AHK to provide evidence. Whilst CVs were submitted, HMRC could not speak to them directly. The HMRC enquiry also highlighted that whilst subcontractors costs formed part of the claim there was no evidence of what they were doing and how it aligned to any potential R&D project.
1.What can we learn from this case?
- HMRC are reasonable with R&D enquiries. HMRC gave the company extra time and guidance to help them evidence what their R&D was.
- If you give HMRC the run around it will put you in a difficult position.It is essential to engage with HMRC when asked – companies or advisors should build a line of communication with HMRC that is both timely and accurate.
2. Don’t underestimate the role of a competent professional
As much as an accountant or R&D advisor should drive out the eligible R&D expenditure with their clients, the company should always be in a position to present the competent professionals to HMRC. This is one reason why GovGrant spends time with our clients (ideally meeting face to face). When we make a claim we always consider how any competent professional will respond to HMRC in the event of an enquiry. It is increasingly common for accountants to be involved with R&D claims, what this case underlines is that it is not just about the numbers and that the technical assessments need real thought and challenge.
3. The baseline is essential to establish the validity of a claim
This means evidencing what solutions were available, why they didn’t work and showing that enough work had been done to explore a solution before embarking on a project. To demonstrate R&D has taken place there needs to be an advance in the field which raises the overall knowledge above baseline. Advisors should take this point as a must – it also aligns to the current thinking in the HMRC tax credit consultation with calls for evidence of IP management at the start and throughout the R&D process.
4. Evidence in any R&D claim should be a legal requirement
There is no actual requirement for technical evidence to be submitted with an R&D claim and it may only be required in an enquiry situation. This leaves the door open to poor practice and accountants need to be comfortable that where their client is using a third party R&D advisor, their client has chosen an appropriate partner with the right level of expertise.
5. Third party costs need to be documented
The costs associated with any claim, particularly from third parties, need to have solid and accurate documentation which details the specifics of what was done or delivered.
What it means for R&D advisors
The R&D market is a competitive one with new players on an almost daily basis. As most advisors charge on a contingent basis, sadly there are some poor behaviours that makes this market feel more PPI than professional services. This case underlines the reality – R&D is complex and need due skill and attention from a professional. We at GovGrant believe in the specialist nature of R&D work - in the methodology of a claim, the compliance to legislation and the technical evidence needed.
This judgement should not scare clients who are making an R&D claim or deter accountants from raising the potential, quite the opposite. This is a vital source of government investment in innovation – but it needs to be treated as such – an investment, not free cash for anyone who asks.
There should be no room in this industry for cowboys and poor practice as agents have a role to play in protecting the integrity of the scheme and that the government investment is well place. Providers who offer headline solutions of compiling R&D claims in ‘minutes, not hours’ need serious scrutiny. Can you get enough evidence in minutes and will those providers be there to support you in an HMRC enquiry? Most certainly not.
There is obviously a need in some cases to streamline processes and make the process reflective of the benefit that is received – but not at the price of potential abuse. DIY software platforms have a role to play but accountants and advisors should be under no illusion that it replaces in depth consultancy when it is needed.