Could using an advisor increase the risk of a compliance check into your R&D claim?

This may seem like a strange question, as you would imagine that using an advisor would reduce the chances of HMRC opening a compliance check (aka an enquiry) into your R&D claim, not increase them. Whilst that may have been the case once upon a time, these days it’s not that simple.

HMRC are trying to find out which specialists are repeatedly preparing invalid claims

Since the beginning of 2022, HMRC have seriously ramped up their efforts when it comes to checking R&D claims. Their dual aims are to stop invalid claims and to gather vital evidence with regards to which consultancy firms are behind the large numbers of invalid claims submitted every year.

If, during an enquiry, HMRC found any inaccuracies with the R&D claim, they would ask the claiming company to answer some questions, with one of them being:

Did you seek any advice from a Tax Professional regarding your claim? If so, who was the specialist and what steps were taken to verify their credentials?

The logic behind this question is to discern whether the claiming company compiled the claim with due care (as penalties can be charged if not) and also to help HMRC gain information with regards to which advisors are responsible for invalid claims.

This has presumably allowed HMRC to build up a list of which advisors are playing by the rules and which aren’t, either due to deliberate fraud or a basic lack of knowledge when it comes to R&D tax relief.

So, to answer the initial question: yes! If HMRC are aware your advisor has been submitting invalid claims, this can increase the chances of a compliance check into your R&D claim.

If, however, you are using a reputable advisor who HMRC haven’t flagged as a potential issue, then this should decrease the chances of an enquiry.

Finding a reputable advisor for your R&D tax relief claim

So, this begs the question, how can you tell if an advisor is reputable? This is actually more difficult than you would think.

You could check if they are members of a professional body, ICAEW, CIOT etc. But this just tells you if they are a qualified accountant, not an R&D specialist. Whilst some members of a professional body will be qualified to provide advice on R&D, there are many more who won’t.

You might look online for information about the company, but these rarely offer an objective picture. Even the consultants who submit lots of invalid claims have nothing but 5-star reviews. They keep the ones from all their happy customers, with any negative reviews being quickly removed.

Asking the advisor themselves or checking their website may only tell you they have a “100% success rate,” but this claim is pretty meaningless, even if it’s true.

Looking on Companies’ House also isn’t much help, as knowing how long they have been around for doesn’t verify they are a competent R&D consultant. Some new companies were formed by experienced professionals, and some which have been going for much longer could have mostly inexperienced staff or poor standards.

All good R&D advisors are honest and competent

I’ve been discussing this recently with The R&D Community’s founder, Richard Edwards. We concluded that to verify an R&D advisor is reputable there are actually two things you need to check.

The first is that they are technically competent. Do they understand all the various rules around R&D tax relief? Can you ensure the advice they give you is accurate, and that any R&D claim they assist you with would stand up to HMRC’s scrutiny?

The second is that they are honest. This might seem like a given if they are technically competent, but sadly it’s not. Some of the consultants who submit invalid claims know perfectly well what all the rules around R&D tax relief are, they just choose to ignore them when it means they can make more money.

So, how do you verify an R&D advisor is both technically competent and honest?

First let’s tackle honesty. One quick and easy way to show you an advisor is dishonest is to check their website and marketing material for statements like the following:

  • “£XX billion of R&D tax relief remains unclaimed.”
  • “9 out of 10 eligible companies aren’t claiming R&D tax credits.”
  • “Members of the RDCC or RDCF, so we have a close working relationship with HMRC.”
  • “We use an HMRC approved methodology.”
  • “You won’t be invoiced until HMRC approve your claim.”

All of these claims are misleading – they misrepresent the way R&D tax relief claims work, how HMRC handles them, and the relationship advisors have with HMRC directly.

If an R&D advisor uses anything like this, it’s a clear sign that they have no problem misleading or lying to you. Don’t expect them to be any more honest when it comes to the preparation of your R&D claim.

Checking an advisor is technically competent can be a bit more difficult. Lots of advisors think they’re competent when they aren’t, and their self-confidence can be misleading if you’re not an expert yourself.

You could try asking them some tricky technical questions to see if they get them right. Here are two you could use:

Q: As the company isn’t revenue generating yet we have accrued for some salary costs, which we will settle once we have some money coming in. Can these costs still be included as part of our R&D claim?

Correct answer: No, for R&D expenditure to be included as part of a claim, the cost must be settled not just accrued for at the time the claim is submitted.

Q: If a customer pays us a deposit to work on a project, which covers all our development costs, with a final payment agreed once we have the developed what they want, can we include this project in our SME R&D claim?

Correct answer: No, you can’t – this is subcontracted R&D which isn’t allowed under the SME scheme. If your customer is considered Large (500+ employees or €100m+ turnover AND €86m+ balance sheet total) then you may be able to claim under the RDEC scheme.

For a small but growing number of R&D advisors, you could also check The R&D Community members directory. This lists how many courses advisors in that company have completed, which should provide some reassurance that they have undertaken some relevant training.

Creating an objective measure of quality for R&D advisors

For now, business have to rely on these subjective measures and tests to figure out if they’re happy with an R&D advisor, but this won’t always be the case. The staff and members of The R&D Community are working on building an industry standard for good practice in R&D tax relief. In the short-to-medium term, this will be an individual qualification for R&D tax relief advisors. In the long term, we hope to create an objective measure of quality, like an ISO standard, which companies can adhere to and earn a matching accreditation.

If you want to participate in or keep up to date with the development of the training, certifications and standards, you can sign up for the newsletter, The R&D Review.