In our last article we highlighted the increase in HMRC R&D Tax Credit enquiries and the need for expert advice when dealing with them.
This time we look at both the type of expertise required and how best to remunerate the expert for enquiry work.
What specific expertise should you look for?
By some estimates, there are up to 250 specialist R&D Tax Credit advisors in the UK, plus a multitude of accountancy practices with varying degrees of expertise.
Only a very small proportion of these have the in-house capability to defend an HMRC enquiry. So how would a claimant go about finding a suitable expert?
This somewhat depends on what the area of focus for the HMRC enquiry is. The letter will state whether HMRC is seeking further details on either “Research & Development activities” or “Costs and calculations”. Often it is a combination of both.
Remember that the stakes are potentially very high so ideally your professional advisor should have expertise in both the relevant field of technology and of tax.
The best way to establish the extent of the expertise this to ask the advisor for the following details:
- The names and professional credentials of their technologists who are qualified in the same field of technology as the R&D claim.
- The names and professional credentials of the tax experts who will be working with you on the enquiry.
- The name of their nominated ex-HMRC inspector who will be advising on the enquiry. (Note: be sure to establish that the inspector worked on R&D Tax Credits at HMRC. Several R&D advisory firms have been touting that they employ ex-HMRC inspectors however some worked exclusively in departments entirely unrelated to R&D and have no actual experience of R&D Tax Credits).
- At least two case studies of previous HMRC enquiries which they have managed to a successful conclusion – ideally, they will provide contact details so you can talk to the reference about their experience.
How will the expert be remunerated for the enquiry work?
For regular R&D Tax Credit work, most R&D advisors work on a contingency fee basis.
This is unlikely to be the case for handling an HMRC enquiry into an R&D claim on which the advisor was not initially involved.
In fact, we would be very wary of engaging for this kind of enquiry work on a 100% contingency basis as you won’t be confident that the advisor is deploying their best – and most expensive – resources to resolve the enquiry.
Fee structures can vary, with some charging an hourly rate whilst others might offer a fixed fee. Some might charge on a “per letter” basis so that each letter written to HMRC is charged for individually.
Regardless of the charging structure, it is important to realise that HMRC will probably appreciate the fact that a claimant has engaged with a professional advisor to resolve the enquiry as it will make their job considerably easier. The questions are much more likely to be answered in a format that allows the inspector to quickly get to the point and to make informed decisions.
For this reason, we would advise that the claimant incorporates an engagement for future claims into the arrangement. This will demonstrate to the inspector that the advisor is committed to the claim and has fully ‘bought in’ to the validity of the claim.
The possibility of an engagement for future R&D claims can be part of the remuneration for handling the initial enquiry.
What are the chances of successfully resolving an enquiry?
This largely depends on whether the claim was defensible in the first place and, if it was, how the claimant and the advisor go about addressing HMRC’s questions.
Many of the questions posed in the enquiry letters are standard and generic however, those questioning whether there was a true advance in science or technology can prove very complex and time-consuming to answer.
There has been much speculation on whether once a tax enquiry has been opened HMRC staff look to justify the enquiry by getting some kind of positive, even partial ‘result’.
There is no evidence that this is the case on an individual claim basis and if an inspector’s questions are answered effectively then in all likelihood the enquiry will be closed with no action being taken.
Having said that, HMRC enquiry teams will be aiming for a ‘strike rate’ that justifies the existence of the enquiry team so there may well be pressure over time to deliver a certain level of successful (from HMRC’s perspective) compliance checks.
In any event, the best way to mitigate the risk of an entrenched HMRC enquiry is to seek expert help from a specialist advisor with the relevant experience.
Thanks to Rufus Meakin – MSC R&D Sales Associate and specialist in large R&D Tax Credit claims; Industry-leading seller of R&D Tax Credits since 2005.
To read the full article, written by Rufus Meakin, please click here
