August 28, 2020
Research & Development (R&D) tax relief has been a positive force for economic growth and employment by stimulating UK companies to invest in innovation. However, it has also been open to abuse, with HMRC suggesting it has identified and prevented over £300m fraudulent claim attempts through the SME R&D tax relief scheme alone.
This led HMRC to launch its consultation, ‘Preventing abuse of the R&D tax relief for SMEs’, in March, which has been extended until the end of August due to the Covid-19 lockdown.
Meanwhile, a further HMRC consultation, also closing at the end of August, is focused on raising standards in the tax advice market. The call for evidence is requesting views on a number of issues including the ‘characteristics of good and bad practice.’
These consultations are relevant to both SMEs, which currently claim for the relief or plan to do so in future, and advisers including those within the accountancy profession, whether they directly advise clients on these measures or commission specialist advisers like ABGI-UK to deliver this service. I would expect them to lead to new rules being implemented which support the government’s aim of raising R&D investment to 2.4 per cent of gross domestic product by 2027, while weeding out fraudulent claims.
The aim of raising standards within the tax advice market can have a positive impact on HMRC’s other goal of reducing the level of abuse of R&D tax relief and we fully welcome both of these reviews.
Since the introduction of R&D tax relief, several advisory firms have emerged across the UK to help businesses identify whether they qualify for relief and support them in preparing their claims. However, they currently operate without any form of regulation or governance.
This has opened the market to lower quality operators, some of which, in our experience, do not stand by their work when the claim goes into enquiry. It also increases the potential for illegitimate, inappropriate or simply incorrect claims being submitted.
While there are many reputable R&D tax relief advisers providing invaluable guidance for clients, there are some companies with low professional standards which not only threaten the reputation of our sector, but can also have a detrimental impact on the businesses they advise.
Understanding the technology and industry baseline to identify if and where innovation has taken place is an essential requirement within this market but there is currently no requirement for an R&D tax adviser to demonstrate they are capable of doing this.
Back in May, we saw the consequences of this lack of professional scrutiny when an R&D tax relief claim submitted on behalf of London-based AHK Recruitment was rejected by HMRC. Following a First Tier Tribunal (FTT), the decision was upheld because the company’s R&D adviser was unable to provide any clear indication about the basis on which the claim was made or produce an analysis of the costs included within the claim. Not only did this result in the company missing out on securing relief but it could also risk their eligibility on any future claims.
Meanwhile, in 2017 Leeds-based company Brewology, a specialist design and manufacturing supplier to the brewing industry, was placed in administration following issues with HMRC over disputed R&D tax credits and a demand for a trading bond of over £200,000. While the company was saved from administration when it was relaunched as PD Brew, it provides an example of how a mishandled claim for R&D tax relief can backfire on a business.
Poor advice from R&D advisers can also lead to a company being subjected to a review of their tax records from the previous six years, which can be extended if HMRC inspectors believe deliberately misleading transactions have been submitted.
It is now time for higher standards to be implemented to give companies using specialist R&D tax relief advisers an assurance they are receiving qualified and professional advice. While it would be wrong for them to assume that only an adviser holding a recognised qualification should be considered, we believe a workable form of regulation is required.
This is in the interest of all credible firms in our sector and it will certainly benefit innovation-focused SMEs across the UK. Not only will it ensure companies are accessing better quality advice, it could also help HMRC achieve its aim of reducing fraud, which would help safeguard its longer-term future funding by the UK government.
HMRC could ensure greater compliance by designating a small number of professional bodies with which an agent must be a member or affiliate, in order to be able to act as a tax adviser. The potential of creating specialist qualifications that bring together the required in-depth knowledge of the relevant tax legislation with the ability to demonstrate competence in the areas of science, technology and sector-specific matters should also be explored.
As part of this process, advisers could also be required to register with HMRC. Clients seeking advice would then be encouraged to only go to those providers which are on an approved list.
More than ever, the UK needs to enhance its competitiveness within the global community. R&D tax relief has proven to be an effective tool in promoting investment in innovation, but it can only achieve its intended aim if it is only offered to companies that are genuinely investing to be world class.
It is also essential that those who advise businesses on how to secure this relief are regulated, certified and also of the highest calibre.