Collaboration is powerful when the right people come together. But what does powerful look like?
Knowing the hallmarks of a good adviser and deciding what you need to support you with your claim is vital.
I’ll be covering 4 core elements:
- Involvement of the right people at your organisation
- An adviser-led approach by a tax qualified R&D adviser
- Have a supporting claim report compiled by a tax professional
- Coordination with your incumbent accountant to get things right
The evolution of R&D tax credits
When R&D tax relief was first introduced in 2000, supporting the claim process was nowhere near as client-friendly or effective as it has evolved to be.
I started my career in tax in 2001, just over 1 year after the introduction of the SME scheme for R&D tax relief. I remember well how unsettling this area of tax was for tax professionals in the early days.
Fast forward some 20+ years and chartered tax advisers enjoy specialising in this area of tax and work collaboratively with clients to join up the industry-specific technical details of client work (the client’s expertise) with the requirements of the tax legislation (the tax professionals’ expertise).
This is a powerful relationship ensuring that not only are claims for tax relief comprehensive in terms of maximising the full value available, but also 100% genuine and tax compliant.
Working relationships in your tax claim collaboration
There are differences in the working practices of R&D advisers. Many of these are driven by pricing. To offer a lower price, the scope of work needs to be reduced, or the interactions between the R&D adviser and their client needs to be reduced.
In my experience, the best results are achieved when the R&D adviser undertakes a full scope of work and actively manages all aspects of the claim preparation process. But this does not need to come at an excessive premium – I typically work on a 20% fee basis, capped at a certain amount, which is well received by my clients.
The benefits of this approach are compounded when an R&D adviser and client choose to work together year on year - building a “co-worker” type of relationship with key points of contact in the business. Knowledge of who does what, where data and information will come from and experience of what is required enables a process to evolve that’s unique to a client’s business and this creates efficiencies through familiarity.
Long-standing relationships should never become transactional in nature. An R&D adviser should always approach each new claim period with the same diligence as their first time working with a company.
Below I have outlined 4 elements present in the most enjoyable and effective client/adviser working relationships when it comes to preparing an R&D claim.
1. Involvement of the right people at your organisation
There are two parts to an R&D Tax Credits claim – the technical narratives and the related financial costs incurred.
The former outlines the qualifying basis of the work undertaken by reference to BEIS (Department for Business, Energy & Industrial Strategy) Guidelines for R&D.
The latter is based on tax legislation and HMRC guidelines per the CIRD (Corporate Intangibles Research and Development) manual to compute the value of the claim correctly.
The technical narratives - your ‘competent professional’
It is absolutely essential that the person in your organisation who oversees and/or works directly on the science/technology being improved or created is involved in the process of documenting the advances and challenges faced; including justifying why knowledge and capabilities around the work are not currently available from publicly available information.
BEIS qualification criteria are drafted very widely and HMRC guidance/examples are limited. It is just not possible to cover the breadth and depth of industries and efforts within these as an all-encompassing list. What qualifies as R&D is constantly changing as solutions are found and documented in the public domain.
Your people know your work inside out and will have the most up to date knowledge of capabilities in your industry because you will have researched this and spent time trying to improve on this. They will be able to articulate this genuinely and with the right questions being asked of them, be able to assure, demonstrate and explain the technical goals, pain points and cycles of development to be captured in a technical report.
The key role of an R&D adviser in this part of the process is to ask the right questions to surface the information that HMRC needs to be covered in the technical narratives. It is not the role of an R&D adviser to confirm categorically whether your work qualifies – although I do see this asserted by many.
Even “domain specialists” working in R&D advisory services cannot know with 100% certainty whether what you are doing represents genuine betterment because there are so many nuances within fields of science and technology. It is near impossible to keep up with what is cutting edge or new for every single presentation of work. But your team will know, because this is what you are invested in and have deeply researched with a full focus on breaking through.
So, the role of any R&D adviser, as I mentioned, is to ask the right questions, the questions that an HMRC R&D case worker will want to see answered and justified. The narratives need to be portrayed in a way that a non-scientific/technical person, who is not accustomed to your industry or what is the state of play in your field, can understand without downplaying the significance of challenges involved.
The role of the R&D adviser is to work with your experts to impart an understanding of what the R&D guidelines require and discuss how your work aligns with this. The R&D adviser will be able to tell you if your work meets the requirements, provided you can together surface the facts that determine the significance and challenges of your work.
Relating financial expenditure - your R&D tax adviser
This requires a joined-up approach involving your staff members that have worked on the projects (technical expert), finance staff, possibly a commercial manager (or someone with knowledge and access to contracts) and the R&D adviser.
Getting to grips with tax computational rule bases that must be linked to activities and processes carried out in development contexts is not always straight forward. This is because applying some of the tax rules is interpretive in nature, nuanced and occasionally not at all clear cut.
In these collaborations:
- Assuming the R&D adviser is a qualified tax professional, the tax professional has an in-depth knowledge of the rules, the costs in point, possible methods to apportion and relate expenditure. For other aspects they will consider facts they need to get hold of, understand, and weigh up to determine the correct filing position across all aspects of the claim. This will be considered with you based on the facts in play for your business and your project work – it’s not prescribed.
- The technical expert will assist with understandings across the roles of staff members and third parties. They will also assist with:
- Identifying the types and suppliers of consumables.
- Insights to formulate methodologies to attribute costs through their knowledge of how items are used in the R&D process and other parameters. It is important that each company considers how to formulate methodologies by reference to the specifics of its processes etc.
- Describing how the in-house development teamwork with any third parties, used by the tax professional to consider the correct filing position and what further cost data/contractual information is required from other staff within the business to support this.
- The finance staff will assist with extracting cost data from payroll and accounting records. The R&D adviser will formulate a plan based on preceding discussions with the technical expert and specify exactly what information is required to finance staff. The R&D adviser can also tweak/tailor this further depending on what records are held to get the best fit to link to underlying data.
- The commercial manager can explain the legal/financial/risk bases of contracts with third parties, whether this relates to customer contracts or supplier contracts. Contractual documentation can be provided to support the statements/explanations given. The R&D adviser will then use this to ensure the correct filing position is arrived at, put across well in the claim report and can be supported if questioned with evidence from the contracts.
2. An adviser-led approach by a tax qualified R&D adviser
Coordinating the extent and timing of information requests or provision is more efficient and focused when undertaken by the R&D adviser. We know exactly what is required and can quickly make decisions as to the best way to proceed. It takes the burden of uncertainty and overwhelm away from the staff working in the business and focuses each person on what they need to provide in isolation.
This can most effectively be achieved when the R&D adviser undertakes a full scope of work and actively manages all aspects of the claim preparation process from discovery assessments through:
- information gathering and analysis,
- drafting of all aspects of the report,
- presenting this to the claimant so they can understand and sign off on it
- supporting the incumbent accountant, if necessary, to effect the claim in the CT600.
A hands-on, discussions-based approach brings huge benefits in terms of time efficiencies and driving out the key information. This impacts justification, costs identification and dealing with areas with complex tax rules or that are sensitive for HMRC to understand.
Dealing with information at the speed of speech and the quality of focus you get from being able to ask questions, disseminate responses and drill down to the nitty gritty is an unrivalled advantage of an adviser-led process.
Feedback I regularly receive is how much more enjoyable it is to discuss work, and have information provision broken down into manageable chunks. Often, the kind of information the R&D guidelines seek to know requires people to think about their work in a completely different way, to avoid discussing the commercial aspects or the functional outcomes.
Arranging a time to speak with people ensures the process starts and maintains momentum. It’s amazing the degree of procrastination experienced when claimants are asked to document projects themselves – people don’t know where to start or what exactly to write about. Time could easily be wasted if the wrong type of information is provided.
I’ve seen the efficiencies of adviser-led discussion-based approaches be questioned on occasion by other advisers offering a route to claimant led-preparation. The point raised being that discussions take a long time.
They can take a long time but only where there are a lot of potentially qualifying projects to discuss for a claim period, and this is often in larger companies that have qualifying project work being undertaken across multiple departments (IT, different product categories, production etc).
So, it is not that the discussions take longer because they are inefficient, it’s because there is more to cover. In fact, an adviser-led approach ensures that nothing is missed when linking the areas of qualifying work with underlying financial and contracts data.
3. Have a supporting claim report compiled by a tax professional
R&D Tax relief/credits is tax advice! But many UK businesses do not realise this, nor do they appreciate that the R&D industry is not regulated – only qualified tax professionals working in this area are regulated.
A qualified tax professional will have an in-depth knowledge of both the R&D qualifying criteria and relevant tax legislation - which reaches further than just the specific R&D Tax Credits rule base in certain circumstances and informs the claim report writing. Note: download my checklist to a robust R&D claim.
They also have knowledge and insights around the intention and purpose of the wording in legislation, current interpretations of the R&D tax legislation by HMRC and experience around tax sensitivities/risks raised by HMRC.
Whilst the tax professional is less likely to have had experience of, or education within, the scientific or technological concepts forming part of an R&D claim, this information is obtained directly from the expert in your business. It is important the details of the work are obtained in this way to ensure they genuinely reflect what you are doing and are not made up or influenced by other external “domain specialists” past knowledge, or experiences which are too far removed from your work.
These combined understandings are used by a tax professional to consider how best to articulate information to HMRC when it comes to presenting the filing position via the supporting R&D Tax Credits report.
It’s also worth noting that HMRC caseworkers are not industry specialists and need things explained in a way a non-expert can understand. A tax professional will be able to stand in the shoes of an HMRC R&D caseworker to ensure all requirements are presented, understood and expressed in a format that a non-expert can understand to demonstrate a clear link to the guidelines and tax legislation.
4. Coordination with your accountant to get things right
Not all accountancy practices have chosen to build up expertise in R&D tax relief claims. This is not a problem as a company can choose a specialist R&D Tax Credits adviser to work with who compliments the mainstream tax compliance services they receive from their company accountant. Oftentimes, an accountant can recommend a trusted R&D tax adviser from previous collaborations (although it's worth asking about commissions received as this may result in less choice being offered to clients).
Personally, I do not pay commissions to accountants - accountants who refer their clients to me simply want the best advice and service from an external consultant they trust.
The specialist R&D adviser will work closely with key staff in an organisation to collate the information required to prepare a supporting R&D tax credits claim report (as outlined above) and then format this as a PDF document.
This document, once approved by the company, can then be provided to the incumbent accountant where they can populate the CT600 with the claim figure and include the PDF claim document as part of the electronic filing submission bundle alongside the company computation, CT600 and statutory accounts.
A good R&D adviser will always support the accountant with the filing process should any further clarifications, assistance or checking of the R&D numbers in the final computation/CT600 be required. It is a further collaboration that helps get things right for the mutual client – the claimant company.
As a tax professional with a foundation to my career spent in Corporate Tax compliance, I believe it’s really important for the incumbent accountant to a) know about the R&D claim and b) be the party to enter the R&D figures and submit the claim to HMRC.
No figures on a return should be changed without your main accountant or tax adviser’s knowledge as it could impact on wider tax planning or tax complexities that your accountant is managing. They need to have sight of this and work with you and your R&D tax adviser if necessary.
From 1st April 2023, all R&D claims will need to be submitted digitally, with a supporting R&D claim report provided as part of the digital filing bundle. In addition, the R&D adviser who has assisted with the claim must be named and stated to HMRC as part of the claim submission.
A senior officer at your company will also need to formally sign off on the R&D claim as part of its submission, meaning it’s important you understand the basis of the claim and are comfortable it is correctly compiled.
Your accountant will be able to ensure that all these requirements have been met and entered in the correct boxes on their tax return software. It is an extra layer of protection for your company in having your trusted accountant make these checks.
And finally, ensuring your accountant is aware that you are intending to prepare an R&D tax relief claim is wise, as the timing of the R&D work can be coordinated so that your main accountant awaits this information before filing your CT600, avoiding the need to submit an amendment.
Main takeaway points
- Collaboration is not outsourcing – beware of processes where people in your business have very little involvement in the information and analysis phases.
- Collaboration is not a reverse engineered DIY exercise – consider carefully whether preparing a claim yourself using automated guidance software or “collaboration portals” truly saves you time and whether you have the right skills and breadth/depth of knowledge across all the taxation aspects to bring everything together. In my experience, involvement in a reviewing capacity is never as valuable as being immersed in the surfacing of information and preparing the facts for the report.
- Collaboration is not the submission of your R&D claim without involving your accountant in the process – it’s important they are aware of all matters impacting your corporate tax filing position. Your accountant can submit the claim without being responsible for the claim. The R&D claim forms part of Corporation Tax Self-Assessment and you can provide a figure to your accountant prepared elsewhere. The main thing is your accountant is comfortable that the claim has been prepared correctly, ideally by a practitioner governed by Professional Conduct in Relation to Taxation (PCRT).
- Having your accountant submit the claim does not affect whether your case is selected for enquiry. I have seen statements from R&D advisers suggesting that they are known to and trusted by HMRC and so submissions with their brand on are more likely to be approved and quickly - this is not true. HMRC does not have an “approved adviser list” and HMRC does not approve claims. HMRC must remain objective, and police R&D claims compliance based on the facts in front of them.
- Never accept a position whereby you do not even see your claim. Unfortunately, there are spurious advisers who cold call companies, convince them they have a basis to claim and then file an amended CT600 on behalf of the company with no report – often, just an arbitrary figure included!
- Any adviser that assists a company with its R&D Tax Credits claim needs to be able to collaborate with the right people in an organisation. Finding the right R&D adviser comes down to personal preference and what’s right for your business.
Working with a specialist R&D tax adviser
I work with people who are serious about getting their claims right and who value an adviser-led process delivered by a qualified tax professional that specialises in this area of tax. If you’d like to discuss your company’s work or find out more about what’s involved in compiling an R&D claim, please do not hesitate to book a call with me.