HMRC has radically changed its approach to compliance, and now reviews around 20% of all claims in detail. What’s more, they’re pretty quick to issue penalties when they think companies haven’t been sufficiently scrupulous in preparing their claims.
This change in compliance has made a lot of accountants and R&D advisors reconsider how they prepare claims and the relationship they want to have with their clients.
While in the past it was common for advisors to take the lead on what work was claimed as ‘eligible’, it’s clear that HMRC wants the claimant company to be far more involved in claims. Towards the end of 2023, they published the ‘Guidelines for Compliance (GfC3)’, which give lots of detailed guidance on what HMRC expects from companies and their advisors when preparing R&D claims.
So, given all these changes, what can you do as an advisor to get your R&D tax relief clients onto more solid ground?
- Client education – Companies typically won’t pay as much attention to R&D tax relief as you do, so don’t assume they’re aware that everything has changed. They should only submit a claim if they’re confident they understand the current requirements of the scheme.
- Useful resources – HMRC’s Guidelines for Compliance on R&D are an invaluable resource. They clearly define HMRC’s expectations and give lots of examples of what’s considered R&D.
- Clarifying roles & responsibility – At all times, the client is wholly responsible for their claim. You can explain that your role as their advisor is to make sure that they understand how the scheme works and how to apply HMRC’s definition of R&D to their own projects.
Related: Do your clients understand the demands of R&D tax relief?
From the very first meeting with a client or prospect, you should be clear about the demands of the scheme. They can’t just hand everything over to you and wait for money to fall in their lap. You’ll need to work together to build a strong claim and get the relief they deserve.
Getting the right evidence for an R&D claim
Your clients need to understand their responsibilities when submitting claims, and you might have to manage their expectations. Send them a link to the guidelines, ask them to read it, and then offer a short follow up meeting to answer any questions they have.
During this meeting, you’ll be able to gauge whether they have read the guidance and the depth of their understanding. If you get the impression that they haven’t read the guidelines, then consider if this client has taken your advice seriously enough. If they don’t take the time to understand the rules for compliance at the outset, then they (and their claim) may not withstand HMRC’s scrutiny.
With all that out of the way, you can then turn your attention to the fundamentals.
- Competent Professionals
Does the client employ or engage people with a wide knowledge of the industry? Are they trained in, and knowledgeable about, the relevant area of science or technology? Would they present well to HMRC if asked to talk about why their projects meet the definition of R&D?
Having these questions at the back of your mind when talking to your client will help you to identify weak claims that could easily turn into hard-to-win enquiries. Without qualified and experienced staff or subcontractors involved in the work, it can be very difficult to persuade HMRC that it was R&D.
- Field of advance
For the projects the client wants to claim for, what area were they working in? Was this definitely within an area of ‘hard’ science, as opposed to social science? Did the company’s Competent Professionals have expertise and a successful track record within these areas?
One of the most common reasons for HMRC rejecting an R&D claim is when it feels like the work was done in an area that’s outside what it deems to be science or technology. Probing your clients using the questions above will help you identify and avoid claiming for projects that HMRC might object to on this basis.
- The advances in technology
Were these ‘appreciable’ i.e. would they be considered significant by an independent, experienced person with up-to-date industry knowledge? Were they measurable and objective, or something harder to quantify (like a subjective improvement in taste or texture)? Were these advances for the industry, rather than just a bespoke solution for a particular client?-
Again, having these questions at the back of your mind when speaking to your client will help you work out the extent of their eligibility. HMRC will often challenge projects that appear to be routine work, or an advance for the claimant as opposed to the industry.
- The technological uncertainties
What issues were anticipated before the work began, and which emerged during the course of the project? Which of these issues could be resolved using routine methods, and which could not? How were these issues resolved – and when did that work start and finish?
Asking your client these questions will get them thinking more critically about their work and how much of it qualifies for R&D tax relief. This should help them realise that only parts of their projects qualify – but may also lead to reconsider additional projects that they’d previously discounted.
As you can see, there are lots of questions that need to be asked when preparing a claim – and only your client can provide the answers! In fact, if we’re going to be precise about it, only your client’s Competent Professionals can provide the answers.
But the good news is that even though HMRC has really tightened up, there’s a lot you can do to minimise the risk of enquiry. It all starts with making sure that your clients have a thorough understanding of the concepts we’ve outlined above.
As a final step, we’d recommend that you download our free Eligibility Checklist. This will help you catch and correct the most common or obvious problems, before they turn into a manilla envelope!
