However, if a client claimed in the past, they are likely to show you details of the projects that they claimed for. This can give you a better understanding of their business and their familiarity with the scheme. It is also a good opportunity to check that their previous claims meet the same standard as the claim you will be submitting on their behalf. After all, there’s a lot of anecdotal evidence to suggest that many SMEs claimed for projects that were ‘borderline’ at best.
Some might say that it doesn’t matter, it’s all water under the bridge! However, the reality is that HMRC is investigating past claims much more intensively than before. Any claim is subject to review, even if the relief has already been granted. This investigation could result in serious consequences, so incorporating this step can help protect your client and earn their goodwill.
This then begs the question – how exactly you can tell that a past claim might be at risk of an HMRC enquiry? There are two key areas to consider when reviewing client’s past claims for potential errors: eligibility and documentation.
When evaluating the strength of a client’s past claims, it’s good to start with their understanding of the scheme. Try to assess their understanding of HMRC’s definition of R&D and how well they applied it in the past. They should be able to explain their projects in a reasonable level of detail, even if they were not directly involved. This is really important, as they’ll be the ones answering questions in the event of an enquiry! Remember that HMRC will assess past claims with their current level of scrutiny. Claims that might have slipped by before are much less likely to now, and if HMRC spots a past claim that doesn’t fit their current definition of R&D then you safely assume that they will challenge it.
Also be on the lookout for cases where the client appears to have abdicated responsibility for the claim to their previous advisor. The claimant company is always responsible for the R&D tax relief claim. Its Directors need to have a good understanding of what qualifies for R&D tax relief according to HMRC’s specific definition. Without it, they are susceptible to acting on bad advice (which may have resulted in the problematic claims in the first place). HMRC is imposing penalties for careless behaviour, which includes failing to take the time to properly understand the rules and following bad advice without question.
If it’s apparent that the client doesn’t really understand the scheme, you’ll need to give them the facts. When explaining HMRC’s specific definition of R&D to clients, it’s good to specifically reference the BEIS or DSIT guidelines (which one applies depends on the claim period). Consider using external resources to get your client up to speed, such as our articles that cover the scheme from the perspective of an SME.
Be especially wary of R&D claims that have incomplete or unconvincing documentation, especially those prepared without the involvement of a ‘competent professional’. This is someone knowledgeable and experienced in a relevant area of technology, who is able to research and assess the industry baseline level of technology involved in the claim.
It’s important to not just fully document the industry’s technological baseline, but also how the baseline was determined, what the attempted advance was relative to that baseline, and the technological uncertainties in the project.
Only with all this information can the project can be effectively presented to HMRC. Without it, HMRC may not be able to see where the advance is and can challenge a claim on the basis that there is no qualifying R&D because the activity resulted in an improvement within the company’s capabilities but not across the industry as a whole.
If a historical claim does not have this documentation, you may wish to highlight that it may be a liability. If the client can’t justify a previous claim, then it may be prudent to submit a voluntary disclosure to HMRC.
Voluntary Disclosure and Penalties
If you are faced with an invalid claim, you can recommend that the client makes a voluntary disclosure to HMRC, corrects the tax position, and repays any unpaid tax as soon as possible. Without a voluntary disclosure, there is a risk that HMRC will make a discovery assessment, including charging penalties of up to 100% for deliberate errors and incorrect CT returns. If fraud is suspected, a Code of Practice 9 (COP 9) Investigation could be triggered, which is very serious.
If you are looking for an easy-to-use tool to assess the quality of historical claims or those of other advisors, check out our Red Flag checklist. We also have lots of resources that can help drill down into the eligibility of potential projects, but our “Establishing Eligibility” course is the most comprehensive resource for understanding which activities qualify for R&D tax relief and how to effectively identify them.