TO PREVENT the abuse of Research & Development tax credit relief claims, HMRC are looking to step up their crackdown on unscrupulous companies promoting exaggerated claims.
At Shipleys Tax, we are aware of the many pitfalls of an ill-prepared claim and the issues to avoid and how you can maximise the the tax relief claim.
This was borne out by the recent case of AHK Recruitment v The Commissioners for HMRC in the First Tier tax tribunal where a claim for Research & Development (R&D) was denied due to lack of credible evidence. In particular, the R&D report which was submitted did not give clear evidence as to how the research and development took place. The Tribunal was amazed that no competent professional gave evidence, not even a witness statement. Nor was there any professional representation.
What is R&D?
Research & Development is a significant driver of innovation, economic growth and employment across all regions of the UK.
The R&D tax relief is a very valuable relief. Under the SME scheme, where expenditure incurred by a SME qualifies for relief, the company can claim an extra deduction in calculating its taxable profits. That extra deduction is 130% of the qualifying expenditure, which means that the company obtains a total deduction of 230% (that is the original spend plus the additional deduction) of the original qualifying expenses.
If the company makes a loss for corporation tax purposes, the loss from the R&D deduction can (with some restrictions) be ‘surrendered’ in return for a payment of R&D tax credit. The payable tax credit is then 14.5% of the loss surrendered.
Abuse of R&D claims
Unfortunately, R&D is not a regulated industry and there are no real barriers to entry which has resulted in a tsunami of new overly enthusiastic entrants who exaggerate what should be considered as true R&D within the rules of the scheme. They may have incorrect suggestions as to what might qualify to encourage potential clients to sign up to their commission-based fee engagements.
The consequences of incorrect claims can be significant on the business. Not only will the business need to repay tax and interest, it may have significant tax penalties which may hit cash flow hard.
One underlying issue is that taxpayers are still failing to understand that the UK tax system is inherently “process now” and “check later”. Therefore whilst the business may receive a tax repayment from HMRC, HMRC have a window to enquire into the affairs of the business and this can be extended in some cases to 20 years.
Therefore, it is imperative to ensure that you instruct experienced and credible R&D firms who are real professionals and technically competent, as well as having high ethical standards, as this is a complicated area of tax law.
- The importance of the competent professional and their experience and qualifications.
- With software claims, the advance and uncertainties have to be in the field of software, not the industry it is being used in.
- Concentrating too much on functionality as opposed to advancement in the field of research, and uncertainty in the report.
- Lack of detailed evidence of costs.
At Shipleys Tax we expect to see a significant rise in cases such as AHK Recruitment above. HMRC are stepping up their crackdown on fraudulent R&D claims and have increased resources to tackle tax abuse due to a significant increase in incorrect and fraudulent R&D claims.
HMRC’s consultation on preventing abuse of R&D tax relief for SMEs closed Friday, 28 August 2020.
To talk through your potential R&D claim and how our team of experts might be able to help, please call 0114 272 4984 or email firstname.lastname@example.org.