Whilst many companies have historically been prepared to take a chance on using an accountant to prepare their R&D tax credit claim, the stakes are much higher now that HMRC has substantially stepped up the number of random enquiries it undertakes into R&D claims.
Therefore, it is worth re-evaluating whether this is still a sensible option in 2022.
The accountancy population and profile.
The UK market for R&D Tax Credits has often been described as being like the Wild West with no regulation and barriers to entry so low that firms ranging from the “Big 4” right down to a one-man-band accountant are all supposedly providing the same service.
There are an estimated 43,250 accountancy firms in the UK but around 80% have less than 5 employees so it would be inconceivable that all these firms are expert in the R&D Tax Credits legislation.
So how does a company seeking a reliable R&D Tax Credit service evaluate its options?
Let’s begin by looking briefly at the different types of accountancy firms and the kind of R&D services they provide.
The large accounting and professional services firms, including the Big 4, but also other large national firms, have always had in-house R&D Tax Credit teams. Service levels can often be good but patchy and quality often depends on which city the R&D team is based.
Then there are the smaller regional or city-based accountancy practices that profess to offer R&D Tax Credit services, perhaps using some in-house staff but alternatively some may recommend a specialist R&D advisor who will often (but not always) receive a referral commission payment from the accountant for the introduction.
Most of these firms will not employ technologists and indeed their tax expertise may also be limited in the field of R&D Tax Credit claims, for example when assessing complex subcontract arrangements or subsidised R&D (for example Innovate UK grants).
At the bottom are tens of thousands of small accountancy practices which almost certainly will have no expertise in science or technology and their knowledge of the R&D legislation will often be minimal. Again, these smaller practices may refer a specialist R&D advisor to do R&D claims on behalf of their clients.
Given the large number of R&D options, it is hardly surprising that many R&D claimants struggle to spot the difference in what can be highly variable service levels.
The two key questions
Regardless of who the accountant is, there are two simple questions that any company looking to claim R&D Tax Credits can ask in order to identify whether using an accountancy practice for an R&D claim is a sensible and viable option.
This week we will focus on:
Question 1: Can they provide expert technical “judgement” to help qualify the R&D?
The first question to ask is whether the accountancy firm employs scientists and technologists who can provide a judgement on whether activity is qualifying R&D for tax purposes.
Many accounting firms say they will “do” R&D Tax Credit claims but what does this actually mean?
Very often the R&D “service” will be limited to giving their client some forms to fill in. The accountant will typically explain to their client that they should be looking for projects which seek to achieve an advance in the overall knowledge in science or technology through the resolution of technical uncertainties.
The claiming company is then left to evaluate its own R&D activity and judge by itself whether what it is doing constitutes valid qualifying R&D under the HMRC definitions which can seem impenetrable to many companies.
It will also need to produce its own written description of why its projects qualify as R&D.
This is very risky for three reasons:
- Firstly, how can the R&D claimant be sure it is capturing all the R&D activity that may have taken place? Most companies will lack the necessary expertise to properly test their activities against the official R&D definitions. As a result, many will be excessively cautious and potentially exclude genuine R&D from their claim.
- Secondly, a claimant may be misinterpreting the HMRC guidelines and include activity that isn’t qualifying R&D. This is commonplace and I have seen many R&D claims containing projects that sit firmly outside the definition of R&D. This is mainly down to a misunderstanding of what constitutes an advance in science or technology, with a claimant mistakenly believing that because its developments are “innovative” or “cutting edge” they qualify as R&D.
- Thirdly, the way that it writes up the projects may not adequately describe the R&D in the terms required by HMRC. For example, there is often a tendency to describe projects in marketing terms rather than focusing on technical advances and uncertainties. Submitting technical descriptions of projects that don’t appear to meet the HRMC definition of R&D will put a claim at a very high risk of an HMRC enquiry.
Our advice would be to ask the accountant for the CV or profile of the technologist that will be specifically handling the claim or, failing that, to request their full name in order to check their credentials on LinkedIn. Key things to look for are PhDs in Computer Science or Engineering, along with several years’ technical experience in the R&D Tax Credit field.
Next week
Next week we will look at how an accountant should and could handle an HMRC enquiry?
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.
