Too many accountants have avoided R&D tax relief due to a misguided belief that it is too complex and too time consuming. As a result, the relief is significantly underclaimed by genuine SMEs. Meanwhile, the unregulated and occasionally unethical activity of dedicated R&D tax relief consultancies is now prompting HMRC to crack down on inaccurate and misleading claims, leaving businesses potentially facing fines and disruptive financial investigation.
Accountants are trusted business advisors for the vast majority of SME businesses and, with HMRC now actively encouraging a more robust, client engaged process, R&D tax relief is a potentially huge service line for accountancy firms. So how can accountants gain confidence and provide clients with the advice and guidance required?
As Mike Dean, Managing Director, WhisperClaims argues, firms need support: support in navigating the complexity of clients’ eligibility criteria for HMRC’s R&D Tax Relief scheme; support in understanding which of their client portfolio qualifies for R&D tax relief; and support in mitigating the arduous and manual processes associated with completing an effective and audited claim.
The UK R&D Tax Claims market has seen ~15 – 20% compound annual growth in recent years, driven largely by an increase in SME R&D claims. Yet the estimated total number of tax credit claims still sits at only approximately 90,000 – indicating a widespread lack of awareness of the HMRC scheme amongst the UK’s 5.58 million SME businesses. At the same time, however, HMRC is concerned that the value of claims being made exceeds the level of R&D activity undertaken in the UK – implying that a significant percentage of claims are invalid, ranging from the misjudged to the fraudulent.
The big challenge for HMRC, accountants and businesses alike is that, unlike all other tax legislation, R&D tax relief legislation is not cut and dried. The guidance – which runs to over 500 pages – can be difficult to apply to the intricacies of real-world situations that don’t fit neatly with the examples given. Today there is no demand to be accredited to provide R&D tax relief advice and no requirement for training. HMRC has adopted a ‘let the market solve the problem’ approach. Which, to be frank, isn’t working.
Over the past few years the market has become dominated by ‘R&D tax relief consultants’ who trade on fear and uncertainty. In addition to embracing a hard sell business model to win clients, these consultancies have systematically undermined accountants’ confidence in their ability to provide this valuable support to clients by vastly exaggerating the complexity of the process. The implications are serious and potentially hugely damaging.
Far too many SMEs report that R&D tax relief claims are made on their behalf without review, assessment or sign off – despite the fact that a business owner is liable for the accuracy of information provided. If the claim raises a red flag with HMRC, there is no come back on the consultancy – the burden falls directly on the SME. Yet with no record or understanding of how the consultancy created the claim, an SME is at a loss. The likely outcome is the immediately repayment of any relief gained but also a fine, even a full financial investigation if HMRC suspects fraud.
With HMRC investing over £160 million over the next five years to increase compliance capacity, investigations into all areas – including R&D tax relief – will increase. Ever more sophisticated technology is highlighting suspicious activity – not only R&D tax relief claims from businesses extremely unlikely to be undertaking any R&D, including care homes and hairdressers, but also claims of a value that outstrip the typical amounts claimed by businesses of a certain size within a specific sector.
This clamp down will affect accountants – many of whom have clients that have fallen prey to the hard sell of these R&D consultants. With SME business owners regarding accountants as the primary source of business and financial advice, an HMRC fine or investigation will have a direct impact on that relationship.
With HMRC now pushing hard to address the lack of credibility in the tax relief scheme, this is now the perfect opportunity for accountants to take back control and deliver an end-to-end client service, including R&D tax relief. HMRC has vocalised a preference for the skilled and accredited accountancy profession to take charge. Moreover, as of April 2023, it will be demanding that every claim filed is supported by a written report and that this report is signed off both by the organisation submitting it and the end-client.
And, despite the myth perpetrated by consultancies, R&D tax relief is not a black art. With the right support and information, any accountancy practice can become proficient in this area. It is different to standard tax practice; but the role of the advisor in this area is not to make tax relief decisions but to guide the client and help business owners to understand eligibility and decide how to progress. HMRC’s guidance is clear: a competent professional within a business is best placed to judge eligibility. The accountant must help by coaching the client and mentoring the claims process.
So where does an accountant turn to find the information and support required to mentor and coach clients? There is an array of tools and support services available, such as software tools that provide a structured process and enable accountants to put together a claim quickly and easily without needing detailed knowledge. In addition, specialist providers are offering accountants access to dedicated R&D tax relief expertise, as well as curated social media groups where they can discuss experiences with peers. Some even offer a portfolio review service, providing accountants with a list of priority clients most likely to benefit from R&D tax relief, as well as a risk review to double check the claim and highlighting any anomaly that may raise a red flag.y
HMRC is reinforcing its commitment to tightening up compliance – and R&D tax relief is a priority. With the scheme’s credibility currently hanging in the balance, it is expected that changes to be introduced in 2023 will be just the start: even more rigorous and robust processes will be added. In the meantime, the increase in HMRC compliance activity will result in claims being more rigorously assessed, increasing the risk of badly handled claims being rejected. Yet accountants – the client’s trusted advisor – will only discover the problem when a distraught client demands support in the face of an HMRC investigation.
Embracing tax relief R&D as part of the core service offering will not just introduce an additional level of client support but also boost an accountant’s reputation and standing as a trusted business advisor. With the likelihood that this will become a de facto part of the overall tax advice model in coming years, those accountants that embrace this area of client support today will also gain confidence, create a valuable additional revenue stream and steal a march on the competition in the process.