2020 Blog Series (3) – R&D Tax Advisors & Practices to Avoid Posted on: December 10, 2020
If you are new to R&D tax, and a potential claimant, how can you know what advisor to engage with?
First, some universal truths need to be established. R&D claims need to involve a multi-disciplinary approach that combines technology and tax/accountancy skillsets. This often means involving two separate people in the claim preparation process, as these skillsets tend to attract different personality types and aptitudes. A pure accountant will generally struggle with R&D claims. R&D claim preparation and the associated diligence is not akin to any other type of traditional tax, accounting or audit service.
An R&D advisor needs to have –
- Real industry technical experience – from actual R&D environments, not just academia.
- In-depth understanding of the Corporate Intangibles Research and Development Manual and the BEIS Guidelines and how this applies to the real world.
- Experience handling and liaising with HMRC.
- Significant experience in R&D claim preparation in conjunction with developing and compiling the supporting claim reports, including the technical reports.
There is little substitute to the investment of getting solid and trustworthy professional advice in order to achieve fully auditable processes and reliable formal documentation to support your R&D claim. The best way to start to understand what sort of advisor to engage with is to understand the sort of behaviours and practices that need to be avoided.
The first step is to recognise the ‘over promise’. This can vary from subtle fiction to complete falsehoods, but these are often underpinned by a ‘brag’ during the sales process. Some great examples we have heard over the years:
“…Oh yes, I have standard R&D percentages for different industries pre-agreed with HMRC”
“HMRC know me personally and we have acceptance for certain methodologies.”
“We can double your claim” – before they have even undertaken any technical analysis.
“We don’t need to speak to your technical staff”
“Anything to do with software will qualify”
“All website work qualifies”
“Let’s just submit it, if we get an enquiry, we can just abort the claim or reduce it through negotiating with HMRC.”
“HMRC know me well, they tend to wave through my claims”
All of these statements are 100% wrong. If something sounds just too good to be true, the chances are your instincts are correct.
Here are 6 examples where well-meaning (hopefully!) people try to cut cost of preparing an R&D claim, but can end up causing significant errors or potentially serious escalations with HMRC.
1. ‘If you write the report and give us the figures, we will just review it for a fixed fee’
This approach can seem like a cost saving, but actually it can cost more in the longer term – in terms of:
- The cost to your business – as staff are taken away from client work,
- The time to resolve HMRC questions,
- A missed opportunity to gain the full scope of the R&D claim.
Your technical staff will be responsible for the ‘heavy lifting’ – the compilation of the claim and technical reports, making assessments, understanding the BEIS Guidelines and how these apply to the development work, and more. By undertaking the R&D claim preparation in-house, it means that these valuable staff are not doing their day-job, which can result in projects being delayed, missed client opportunities, or non-chargeable time.
The next problem is the risk of ‘unintended fraud’. With this approach, your advisor has probably skipped any sort of workshop, training session or interview process. Two disjointed and potentially isolated activities are happening:
- Your technical person will have written the report potentially without any in depth or practical understanding of the BEIS Guidelines.
- The reports are then being reviewed at ‘face value’ by your advisor.
With this approach, the advisor has no real insight into your development activities. Your advisor has a remit to provide feedback or edits to ensure that the draft report ‘reads’ like a qualifying report – the result is that the report can risk no longer representing a reality. In addition, with no assessment or interview process taking place, there is no way to correlate the narrative of the claim report against the scope of the figures being claimed. Could the claim be too small or too large? Is the claim methodology correct? Are the correct costs being included? It’s impossible to say.
The advisor has probably acted in good faith, as too has the report writer, but this disjointed process has resulted in people only hearing what they want to hear, unintentionally bypassing any objective review or assessment process.
2. “Let’s just submit the figures, it will be cheaper”
This is the legal minimum requirement but this approach does increase the risk of questions from HMRC. In the short-term, it will save you time and money as you haven’t taken the time to compile a formal report, but the risks are high. Questions to consider:
- What is the agreed scope of support from your R&D Tax Advisor?
- What actual assessment will the advisor deliver? If none, what are you paying the advisor for?
- If there has been an assessment, how is it being documented? You may need to refer to this documentation at a later stage due to an audit, unrelated due diligence, or a future HMRC query.
- In the event of an escalation, how will you be supported by your advisor and what will it cost you?
- At what point are the fees due to the advisor and is this appropriate?
- Are you considering selling your company at any point? Due Diligence may highlight the R&D claims as a risk if there has been no formal process put in place.
A ‘numbers only’ approach that skips the formality of a supporting claim report is not well suited to the vast majority of claims and should be avoided.
If you do take a ‘numbers only’ approach, you must always be prepared to write a report at a later date if HMRC request it, even if this is a few years after the claim has been made, and even if your developer or the staff involved in the claim preparation have potentially left. Failure to answer HMRC questions or being able to explain the R&D can only result in a claim being rejected and any previous cash benefit (R&D Tax Relief, RDEC or R&D Tax Credits) needing to be paid back to HMRC.
3. Purposely making claims much smaller than they should be.
This approach can sometimes be taken on the premise to avoid HMRC attention. In my opinion, this lacks professionalism and integrity. I am also unsure how HMRC would ‘know’ the claim is an ‘under-claim’ without opening an enquiry – which was exactly the intention of the approach in the first place! Would you voluntarily over-pay Income Tax, VAT or Corporation Tax to avoid HMRC attention? No, it would make no sense!
On the other hand, it may simply be that the advisor hasn’t understood the BEIS Guidelines or the development activities.
4. The advisor makes up their own staff percentages or apportionments for you
No one knows your business better than you. This is your claim, and you should be making the judgements for the percentages under the guidance of your advisor.
5. “Just fill out this template or online form”
The advisor hands you a template or questionnaire to fill out – the advisor then copies and pastes the content into a report – forming the submission document. In this case, it is often true that no workshop or technical interview has taken place. There is very little ‘value add’ in this service – you have taken the time to write the summaries into the template, and you are taking the risk to make potentially uninformed and untested judgements concerning the scope of the R&D claim.
R&D tax claim preparation is not scalable into an automated process. Online forms with a Q&A-style approach can be no substitute to holding detailed workshops and technical discussions to fully understand and help a company to assess the full potential of an R&D claim. This process needs to be iterative, dynamic, and involve in depth technical discussions around how to interpret and apply the BEIS Guidelines to your specific company’s activities.
It is not uncommon for advisors (often pure accountants) to side-step technical interviews. I would advise you to find a different advisor in this case.
6. The advisor compiles a claim report (and potentially a technical report), but will not show it to you
It is difficult to understand why this is happening, but I have seen this occur a few times. The cynic in me would say that the advisor has likely not compiled a report and is taking a ‘punt’ at submitting a numbers-only claim without telling you. It could be that the report is just not that good, and they don’t want you to see it!
In all cases, this is your claim, and you should always have final approval of any documentation before it is submitted to HMRC.
If an advisor refuses to let you see any aspect of the R&D claim documentation – do not give them permission to submit anything – and put that in writing. If they have the 64-8 form already filled in, or are in possession of a ‘Letter of Authorisation’ – you may need to act quickly to put something in writing to protect yourself and seek legal advice.
Doing some good ol’ fashioned diligence will give you a ‘feel’ for any advisor, and certainly leave you with a ‘gut feeling’ as to whether this engagement is sensible or not. Even simply raising some of these questions will be enough to frighten off some of the undesirables. Some further questions to consider as part of this process:
- Is your advisor associated or supervised by a regulatory body? For example – CIOT or ICAEW?
- Does your advisor share their data protection and GDPR policies on their website? This is a legal requirement.
- Does your advisor secure your data? What security practices and data protection policies do they have in place?
- What insurance does your advisor have?
- Who will actually be working on your claim and your point of contact? Will it be the person that sold the engagement to you? Will it be the same staff year-on-year?
- Has the advisor undertaken KYC (Know Your Client) processes or background checks on your company? This is a legal requirement under the Anti-money laundering (AML) act which they are responsible for.
- Is your advisor on LinkedIn with a career path and experience that would make sense to you?
- Do they have tax knowledge? Are they technologists? What qualifications do they have? Who are their other other client
- Is the advisor a member of the RDCC? (R&D Consultative Committee)
Weigh up the evidence to understand what level of professional you are dealing with before deciding to engage.
– Paul Mann, Managing Director @ LinkStep R&D Tax Services