R&D Tax Credits – Errors, Mistakes & Abuse
HMRC’s quest to tackle abuse of the relief requires little change in the practices of authentic advisers and genuine claimants.
Throughout this article we will outline the common errors and mistakes made within the R&D Tax Credits industry, as well as identify the key areas that are abused by select individuals.
- Understand where the problems come from
- My perspective on how things came to this
- Why is the R&D tax advisory industry attracting non-tax professionals?
- The emergence of an unregulated industry
- From ignorance to abuse
Understand where the problems come from
Advice around the legislative framework for R&D Tax Credits is tax advice. Until recently, the significance of this has been glossed over – positively quashed at times, as non-tax professionals have entered, what should be, a professional services market to assist companies with claiming this tax relief.
Currently, there is no regulatory requirement for an R&D adviser to be a qualified tax professional, so anyone can call themselves an ‘expert’ in this relief. A tax professional is regulated through membership of a professional body such as The Chartered Institute of Taxation (“CIOT”). However, R&D Tax Credits advice as an industry is unregulated, and sadly not everyone realises this!
A huge issue was acknowledged by HMRC in their November 2021 report findings following an R&D tax relief consultation. At sections 2.31and 2.32 (page 8) of this report, HMRC states:
“We have seen a recent emergence of R&D advisers, who are typically not members of professional bodies, cold-calling Small & Medium Enterprises (SMEs), suggesting they could make an R&D claim.”
“These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit dubious claims. The commission basis can lead companies to view a claim as cost-free and some are willing to accept questionable claims”.
Non-tax professionals acting outside of any regulatory umbrella as an R&D Tax Credits adviser has led to mistakes, boundary-pushing and at worse, “sticking in” claims with no qualifying basis whatsoever.
Fraud in R&D Tax Credits has been estimated to be c.£311m, with the SME scheme more likely to be targeted because of the availability of a significant payable cash credit. HMRC is now under pressure to act, focusing more proactively on discovering cases of boundary-pushing and abuse in submitted claims.
My perspective on how things came to this
As a qualified chartered tax adviser who began a career in corporation tax in 2001, I have experienced the evolution of this R&D Tax Relief, almost from its inception, and encountered first-hand many of the issues I outline in this article.
I believe the situation the industry now finds itself in, has grown out of unfamiliarity with elements of qualification criteria in the early days within the tax profession; together with misplacement of the role of “industry experts” in an advisory capacity.
What I cannot be sure of is whether wrongdoing is down to confidence through ignorance, or deliberate exploitation of the regime (perhaps it’s a mixture of both).
But I do know for certain that the very purpose of the relief has been overshadowed with R&D Tax Credits being leveraged in a way that is deceptive. As a result, many innocent, unsuspecting businesses are being used as a vehicle for dubious “R&D advisers” to make money.
Why is the R&D tax advisory industry attracting non-tax professionals?
Confidence to articulate an understanding around defining qualifying R&D projects is key for bringing non-tax professionals to work in this industry.
Another factor is the earnings potential to profit from giving advice which has encouraged many to set up their own ‘specialist’ R&D advisory practices.
1. Getting the right people in the right roles
Before we jump into this, you should understand that two important roles must be filled when making an R&D tax claim;
An industry professional
Also known as a competent professional, this is someone with specialist knowledge of the industry.
When referring to an industry professional, it should be someone working in the claimant company who is intimately familiar with projects and has the knowledge or the right background credentials around the work undertaken.
This does not mean someone who has had experience of, or a general knowledge of the same, adjacent or similar industry of a claimant company.
The industry professional will be responsible for identifying qualifying project work.
A tax professional
This should be a chartered tax adviser who specialises in R&D tax credits. They will be responsible for identifying allowable expenditure.
The tax professional stands in the shoes of a HMRC caseworker seeking to understand the fit to the qualification criteria as a layperson. Remember that HMRC caseworkers need to consider R&D Tax Credits claims across a wide range of industries and cannot be experts or up to date in the latest movements in all of this. It is up to the tax professional to articulate their work in such a way that justifies the claim to them.
2. Understanding the BEIS guidelines
Working out whether a company is entitled to claim this relief in the first place requires an understanding of, and ability to articulate the application of BEIS (Department for Business, Energy & Industrial Strategy) guidelines for R&D. Whilst these guidelines are linked to tax legislation as qualification criteria, they are provided to outline what is meant by R&D - defining what the tax relief is seeking to subsidise, or reward.
This part of qualification is therefore dependent on industry expertise, explanation and justification. The application of tax legislation is then worked through separately if a qualifying project is identified.
Anyone who studies the BEIS guidelines can help others to understand them and the context in which they are applied. You do not have to be a tax professional, nor an industry expert, to understand and explain the guidelines. However, articulating, explaining and justifying how project work undertaken by a company meets the BEIS guidelines needs to come from the competent professional working in the company.
The role of an R&D Tax Credits adviser must be to take note of what the competent professional is saying, interrogate to check the guidelines have been understood and are considered to be in point; and then relay this information to HMRC in a format that
a) a layperson can understand
b) that demonstrates how the criteria of the BEIS guidelines are met.
There are advantages of someone with related industry experience undertaking this role over a tax professional in that they can more readily understand what the competent professional is describing. Yet there are also advantages of a tax professional undertaking this role over an industry professional in that there is no preconception or assumption of what is being undertaken; they can question the degree of challenge faced so it can be understood by a lay person, and question the baseline achievements from a non-bias view point.
Anyone who can understand what the BEIS guidelines are looking for can assist the competent professional with the knowledge share, questioning and checking qualification criteria are met. Many competent professionals involved in compiling evidence for R&D Tax Credit claims year on year also become extremely adept at knowing what qualifies and what doesn’t.
The key thing to note is that ultimately, qualifying projects are the judgement call of the competent professional, armed with an understanding of the requirements imparted by the R&D adviser.
It is not the judgement call of the R&D adviser – the concept of Self-Assessment. R&D advisers should help competent professionals make that judgement call – if qualification criteria are not met then your R&D adviser should be telling you your projects do not qualify.
And so, a non-tax professional, whether they are a company’s own in-house competent professional, an external party with knowledge of your industry, or anyone else, can competently assist a company to assess qualifying project work. And tax advisers who are not industry professionals can also assist with this process, despite a lot of defamation to diminish the capabilities of the lay person in this regard.
3. Fees earned are favourable
Tax/cash savings are generous, and the fees earned are favourable and effectively funded by the relief, too, making R&D tax credits an enticing path for budding non-tax-professional entrepreneurs.
Fees are often calculated as a percentage of the tax/cash benefits achieved from making an R&D Tax Credits claim, so it’s easy to see why so many unqualified professionals are drawn to this space, considering some claims reach the millions of pounds mark in cash benefits.
Although the topic of percentage-based fees can be debated, when done with integrity and set with decency in mind, it ensures that both the claimant company and the tax adviser are fairly rewarded.
For example, I typically charge 20% of the tax/cash benefits achieved but cap this fee at a certain level, meaning the fee never exceeds a certain amount of the cash resources it creates. Essentially, for large claims, the effective fee percentage becomes much lower – on some of my largest claims, equating to just under 10%, for example.
Unfortunately, not all advisers operate in this manner - I am aware of R&D advisory firms charging 25% - 33% as a performance basis with no cap; and fixed fee bases that have resulted in more than 50% of the cash benefits being paid to an adviser (a sad reality for many smaller claims).
R&D Tax Credits (comprising the SME and RDEC schemes) provide extremely generous tax savings/cash pay-outs, particularly the SME scheme which can deliver a payable cash credit of 33p per every £1 of qualifying expenditure claimed in certain circumstances. In 2019, UK companies claimed tax relief on £47.5 billion of R&D expenditure. From these figures it is clear to see the earning potential for advisers within this industry.
The emergence of an unregulated industry
With confidence to advise on the first of two bases of qualification criteria, non-tax professionals have also picked up knowledge of tax rules too, growing in confidence to undertake the related tax calculations and narratives for qualifying expenditure, forming the second part of qualification.
Some advisers with no background in tax have picked up an understanding of tax legislation working as part of a boutique R&D advisory firm, or as part of the multi-disciplinary team of a larger tax practice.
In my experience of working in such a multi-disciplinary team for a big 4 accountancy firm, explanations of tax rules were provided by the tax professionals in knowledge sharing sessions. But it was always the tax professionals who undertook the work to calculate, justify and outline qualifying expenditure and deal with any tax sensitivities or areas of tax risk with clients.
R&D tax advice can often require knowledge of wider corporation tax matters and how an R&D Tax Credits claim might impact the wider corporation tax computation. In addition, tax case law, experience of liaising and working with HMRC to resolve enquiries and working through establishing a robust filing position for an R&D claim is very much in the realm of professionals practising in taxation.
Money is sadly becoming the driving force
With the ability to earn well out of advising on this relief, individuals have broken away from training firms to set up alone or with ex-colleagues and grow their own practices. And here is where the problem began.
Many firms or more importantly, the advisers within them, are qualified tax professionals that have become experts in the mechanics of all aspects of this tax relief. It is also commonplace for such firms, and indeed large tax practice specialist R&D departments, to include “industry specialists”, meaning a non-tax trained person that has experience in a field of science or technology sufficient that they have a shared understanding of what goes on in that industry when relating to a client.
However, some of the specialist R&D advisory firms do not employ any qualified tax professionals. Many have set up on their own as a group of individuals having worked as part of a team in another R&D specialist firm. Some have not worked as part of an R&D team at all but have been attracted to this industry because of the fee earning potential.
Anyone can call themselves a tax adviser – the R&D industry is not regulated. However, only an individual that has undertaken tax training and exams and is a member of a recognised professional body such as the Chartered Institute of Taxation is rightfully a qualified chartered tax adviser.
At the end of the day, R&D Tax Credits are a tax item, defined and administered by tax legislation and filing processes and policed by HMRC. R&D Tax Credits require tax advice, an appreciation of tax risk and a qualified chartered tax adviser should always be involved in the claim process.
From ignorance to abuse
There are now many unqualified and unregulated R&D advisory service providers that have entered this space. Granted, not all advisers in this industry are intentionally pushing boundaries, but intention doesn’t change the stance of HMRC when they find errors or mistakes in claims.
There are, unfortunately, advisory firms that carelessly canvas UK businesses that are not eligible for this relief or are deliberately overclaiming through poor quality advice around qualifying expenditure.
This is where HMRC wish to crack down.
I know many reputable advisers feel that this behaviour not only undermines the purpose of this relief, but also harms the reputation of genuine R&D advisers. I empathise with UK businesses that have placed their trust in an adviser that has approached them and convinced them their work qualified when it didn’t.
99% of the time, the automated corporation tax system will simply issue repayments of corporation tax, leading people working in these businesses to believe their claim has been accepted by HMRC and remain completely unaware that they had been wrongfully advised. Unsuspecting businesses are left unable to substantiate their claims when questioned by HMRC.
This is not to say that there aren’t good advisers out there, as there are. They can effectively collaborate with the right people in UK businesses to produce comprehensive claims with 100% compliance. [See factsheet – hallmarks of a good adviser]
Working with a specialist R&D tax adviser
I’m a qualified chartered tax adviser and a member of the CIOT, with 20+ years’ experience working in tax – predominantly corporate tax.
I began my career in tax in 2001, just a year after the first scheme of relief for Small and Medium Enterprises (“SMEs”) was introduced for R&D Tax Credits. Having trained within the tax practice of a Big 4 accountancy firm, I continued to work in practice for that same employer for a further 11 years. I spent 6 of these years working in corporation tax compliance, before specialising in R&D tax relief within the same Big 4 accountancy firms’ national R&D team.
In 2012, I left my employment and set up Copper to solely focus on supporting UK businesses with the process of compiling R&D tax credit claims with 100% compliance.
“Copper” became Copper Tax Limited in 2019, however, Copper Tax Limited is Claire - you get me, every time.