Claiming R&D Tax Credits was once seen as a formality for tech start-ups.
VC investors loved the certainty provided by the R&D scheme and the added runway it gave their portfolio companies.
This worked well in the days when HMRC checked less than 1% of R&D claims.
Over the last couple of years, however, there have been major concerns around abuse and inflated claims, leading to HMRC opening compliance checks into more than 20% of all R&D claims annually.
HMRC’s starting position for many software-based claims is that the R&D is not qualifying. No matter what arguments the claimants put forward, HMRC is very likely to reject the claim.
This has caused a “flight to quality” for R&D claimants, who are increasingly seeking help from expert R&D advisors rather than a non-specialist accountant or self-service platform.
Claimants have begun to realise that not all R&D advisors offer the same level of expertise or support. In some cases, if a low-cost provider faces an HMRC enquiry into one of their claims, it can be cheaper for them to just repay their fee and leave the claimant having to defend the enquiry on their own.
This is a major problem for VCs who understandably don’t want to commit funds to a company that may face a future clawback of its R&D Tax Credit claim, with possible penalties and interest on top.
With thousands of R&D claims now being challenged, a potential clawback by HMRC can undermine a start-up’s cash flow and potentially even its survival.
VCs have also noticed that R&D claimants who don’t use a recognised, reputable advisor are at a higher risk of having to repay R&D claims, making their investment significantly higher risk.
This means that some VCs are now undertaking specialist due diligence into R&D claims before making an investment.
I have heard of one VC that has a list of R&D advisors graded by quality and expertise. It can be a major problem for a company seeking investment if its R&D advisor is not at, or near, the top of the list.
Understandably, VCs and R&D claimants don’t want to talk openly about this issue, and it is rarely discussed in R&D advisory circles.
Article written by Rufus Meakin
Rufus Meakin works with tech companies to help ensure their R&D Tax Credit claims are accurate and defendable.
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