When assessing eligibility, there are two key points to focus on:
- HMRC’s narrow definition of R&D: Clients may be confused by misleading explanations found around the web, some of which suggest almost anything qualifies as R&D. HMRC’s subjective definition of R&D and how it applies to each client’s technology can be tricky to interpret, and they really don’t hold your hand at all. Distilling all of HMRC’s guidance and your experiences into a clear, concise explanation of what qualifies as R&D is maybe the most challenging aspect of interacting with new clients – especially when they’re starting off with misconceptions about what qualifies.
- Pinpointing when R&D starts and ends: Misunderstanding the timing of when R&D for tax purposes starts and ends can be very costly. While mistakes are easy enough to make, due to how abstract the guidance can be, HMRC can penalise your clients for carelessness. It’s not enough for you to understand HMRC’s guidance—you also need to explain it clearly to your client and make sure they set the boundaries of R&D correctly.
With HMRC taking a hard line on compliance, it’s essential to lock these details down from the get-go. To help you improve your client conversations and build a profitable and sustainable R&D service, here are 5 essential problems to avoid:
#5 – Not sharing the latest guidance from HMRC
Applying the guidance can be confusing, so it’s tempting not to show it to the client. You might feel it’s easier to give a brief summary than to overwhelm them with details. However, it’s best to do both: show them the guidance but focus on some key terms like “scientific and technological uncertainty” and “appreciable improvement.” The more they understand HMRC’s definition, the easier it is to determine which parts of their project qualify for relief.
If HMRC issues a compliance check, they’ll want to establish whether your client took the time to understand the rules. Sharing the guidance helps protect your reputation, as it shows you took due care in keeping your client well-informed. If you don’t share it, the client might blame you during an enquiry. It pays to make sure you’re well protected!
Now, lobbing the full dry and dusty DSIT guidelines to your clients and expecting them to absorb it all is a big ask, but you do have some other options.
Published in 2024, the Guidelines for Compliance 3 are the most comprehensive and straightforward set of directions that has ever been released for the R&D Scheme. It contains useful examples that illustrate core concepts of the scheme, making it easier for non-advisors to understand. It’s still a hefty document, so you might just want to highlight the most relevant and helpful sections to your clients.
Related: 3 steps to effective R&D eligibility screening conversations
#4 – Sticking to the same approach as your client’s business grows
In smaller companies, the Managing Director (MD) usually knows the technical details of all projects. However, as the company grows, the MD’s focus often shifts to strategic matters. Relying exclusively on the MD for technical input, even as they step back from project details, can be risky. It’s important to maintain contact with the client’s competent professional(s) and to involve them in the claim each year.
Plus, as companies grow, core development teams may spend more time on routine tasks that don’t qualify as R&D. This means that apportioning their time as 100% spent on R&D activities is no longer accurate. These apportionments are easy for HMRC to spot, and they can act as enquiry-triggers.
#3 – Assuming that an advance in science or technology is the only test for R&D
Sometimes a client will ask you to claim for work that’s an obvious advance in technology within their sector. What they’ve achieved is better than anything else out there. So that’s an R&D slam-dunk, right?
Not necessarily.
HMRC’s definition has two parts – it states that R&D occurs where the client is trying to “advance technology” by “resolving technological uncertainty.” This means that if the client was able to make an advance without any kind of significant challenge or difficulty, they shouldn’t be claiming for that, because there wasn’t any technological uncertainty.
So when a client comes to you with a whizz-bang new product or prototype, that’s great – but definitely not the whole story! Make sure you ask them what technical difficulties and challenges they had in bringing it to life – and how they managed to resolve those. If there weren’t any uncertainties, then they’re not eligible.
#2 – Assuming that having patents = eligible work.
This is an easy mistake to make. Having a patent means that the client has designed something that’s different to everything else. But being different doesn’t always mean that it’s better, or that it meets HMRC’s definition of R&D. The work must represent an advance, as well as being different.
There is a relationship between patents and R&D tax relief, just not the one that clients might assume. While not all patents are for things that are a technological improvement, most solutions that are technologically better are likely to be patentable.
So, ask your clients if they have any patented solutions, but don’t stop there. Make sure you then ask them:
- How the patented item advanced technology and,
- What technical challenges arose in its creation and how they resolved those.
#1 – Always concentrating on the low-hanging fruit.
The number one mistake accountants make is being reactive, rather than proactive, with their client portfolio. It’s so much easier to focus on the clients that self-identify as having qualifying R&D work – especially when you’ve already got a lot on your plate.
Unfortunately, there are plenty of other people out there looking for new R&D clients, and they make a lot of calls and knock on a lot of doors. When they find one of your clients, you can find yourself on the back foot. Either you have to explain why they aren’t eligible, or you have to explain why you weren’t the first to tell them about a significant source of support. From a client management perspective, that can get awkward.
One way to solve this is to train your broader team in R&D and what it looks like, so that they can screen clients and refer them to you for further investigation. If your team knows more about the R&D scheme in general, you’ll miss fewer opportunities, have fewer stressful conversations, and feel in much more control of what’s happening within your client portfolio.
Looking to produce stronger R&D claims?
Our course Qualifying Leads for R&D Tax Relief helps you nail down the key aspects of identifying strong claims right from the start. You’ll have clearer, more informative conversations with potential clients and avoid getting tangled up in HMRC enquiries.
It’s included as part of our membership, or you can purchase it as a standalone course.
