Many businesses prepare their own R&D tax credit claims. However, it’s easy to get things wrong without advice. The risk of error is one thing, but you may also be missing out on the full potential of your claim. It’s a false economy.
Whether you’re already claiming R&D tax credits for yourself or just thinking about doing so, there are at least three big risks to consider. Here’s why you should think carefully before going it alone, and why you really shouldn’t underestimate the value of specialist R&D tax advice.
1. You may get less than you are due
Choose to self-prepare an R&D tax credit claim and you risk not getting the full benefit to which your work entitles you. Whether that’s as a result of not identifying all of your R&D projects, or missing some of the less obvious R&D costs ; you could be missing out on getting relief for significant cash investments you’ve already made.
Undervaluing R&D tax credit claims is all too common – the official HMRC R&D tax credit statistics 2022 show that nearly a fifth (17%) of SME claimants received less than £5,000. In many cases, that’s way too low against an SME average claim of £53,663. Especially when you consider that sometimes SME claims can be worth hundreds of thousands of pounds.
Why do self-claimers get the value wrong? Simply because it’s not their speciality. For example, can you confidently factor in grant funded or subcontracted R&D without jeopardising the claim? Are you aware of all of the other intricacies that an R&D-specialist chartered tax adviser is?
Complexity often leads to cautiousness, especially when you consider the implications of over-claiming R&D tax credits. However, HMRC’s main aim is that companies pay the right amount of tax, which means not getting too much or too little.
To those unaccustomed to dealing with R&D tax credits every day, there are a few situations which prompt a bit of head scratching. For example:
- How to accurately calculate the R&D tax credit benefit for both loss-making and profit-making businesses. And how to calculate the benefit for claims of businesses when profits fluctuate.
- How to correctly calculate claims for businesses that are part of a wider group, particularly where there are group losses, or recharges of R&D expenditure between companies.
- How it’s possible to use grants and R&D tax credits.
- Accurately determining whose R&D it is when multiple parties are involved in a project .
- Understanding the treatment of subcontractors for R&D tax credits.
- Knowing what defines a large company vs SME, plus how to know and what to do with the R&D tax credit claim at company status change, when one becomes the other.
- Recognising how capital allowances and R&D tax incentives compare and interact.
- Understanding the rules around connected parties and R&D tax incentives.
Undervaluing the claim is not the only hazard concerning value. Overvaluing the claim is commonplace too and runs the risk of a protracted and potentially costly HMRC enquiry. It’s quite common for businesses to do one small claim without challenge, then repeat the same mistakes in subsequent years only with much bigger numbers.
HMRC might not challenge the smaller claims, but if and when the numbers grow for subsequent claims, the mechanics of calculating the value will still be wrong and that causes potentially major issues down the line. Even the smallest claims can be complicated to do right.
Can your business afford to miss out on its full-value claim?
R&D tax credits example of a claim value increase
“ForrestBrown started by reviewing one of our existing claims. With the technical backing of their tax experts and sector specialists, they were able to increase the value of our R&D tax credit by 400%.”
Terry Mitchell, CEO Armorgard
2. Your time is money
R&D tax credit applications can be time consuming. If this time is not well spent, or could be better spent elsewhere in your business, then that becomes a problem. Having an expert by your side who deals purely with R&D tax credits day in day out is a good way to streamline and prioritise your investment. A good team ensures the right people are in the right roles to secure a positive outcome. You and your R&D tax adviser should work as a team.
Time commitment is a particularly common problem for senior technical staff. Their contribution is critical, but it takes them away from their day jobs. They often don’t properly understand what’s needed from them either or the implications of what they are being asked to do. They can be left either undervaluing the R&D, or just feeling very exposed. Never more so than if the claim gets challenged by HMRC.
Neither can R&D tax credit claims be managed exclusively by the finance team (with no technical input). Finance teams are often the ones who identify the opportunity for R&D tax credits and end up owning the process, but they need engagement from the technical team. Sometimes, this can create frustration or conflict. (Sound familiar? We can solve that).
Our approach is necessarily bespoke for each of our clients. Whether you just need some support to prepare your claim, or you would prefer to outsource the process in full, we develop a claim methodology that’s right for you.
Being quick, efficient and not cutting corners is key. This balance is achieved by few but the best R&D tax credit advisers. Beware quick fix portals suggesting this is unnecessary. It is not possible for an R&D adviser to prepare a claim with no input from you the client (especially your technical staff) – anyone promising they can is lying, incompetent or both.
R&D tax credit example of time saved
“The best thing about working with ForrestBrown was taking the time burden away. It released all of our expensive people back into the business, which was a huge benefit.”
Adrian Roberts, Managing Director, CI Precision
3. Your R&D tax credit claim might come back to bite you
Preparing R&D tax credit claims is not your day job and because of that self-prepared claims run a high risk of including errors and inaccuracies. If HMRC spot an error, or they suspect there might be one, instead of sending you a cheque, HMRC will send you a letter. This is an ‘HMRC enquiry’ letter and it puts the ball squarely back in your court. Typically asking you to produce more evidence to substantiate your claim, and sometimes culminating in penalties if you cannot convince them the claim was robustly prepared.
Penalties used to be quite rare in R&D enquiries but are now considered as standard practice, and becoming more common since HMRC’s shift in approach. Any reduction in the value of a claim during an enquiry risks a penalty being charged. Penalties are higher where taxpayers don’t contribute transparently and professionally to an enquiry, for example, by not answering letters on time.
Not only is this another shortcut to foregoing tens of thousands of pounds, this sort of experience tends to leave businesses regretful of embarking on a claim in the first place. Bruised by the experience, they give up on claiming in future periods.
Our R&D tax credit enquiry support service is there to help businesses who began the claim themselves or with another adviser, but find themselves facing questions from HMRC.
R&D tax credit example HMRC enquiry
To illustrate the point, one business we helped, had a particularly stressful experience prior to seeking our help.
Their accountant prepared their claim and missed the statutory deadline for their first claim. The next claim was for two accounting periods and was valued at £250k. Even though it was good R&D, the claim was badly prepared. Cost categories were inaccurate – they had included rent, legal fees and patent costs, while the subcontractor costs were wrongly apportioned.
They had not calculated the benefit correctly, demonstrating a fatal misunderstanding of the mechanics of the calculation. There was no mention of the definition of R&D in the context of the BIS Guidelines (it’s vital these are understood by anyone claiming R&D tax credits). Ultimately there was no understanding of the claim.
They were asked to give back all £250k and were facing going out of business.
That’s when we were approached to fix the mess. Our enquiry support service totally reworked the erroneous claim, protecting as much as possible, effectively saving their business. Then we did the next claim for them and were able to identify enough R&D to offset the erroneous claim and prevent them having to pay back any of it.
R&D tax credit portals
In recent years, online services – or portals – for submitting R&D tax credit claims quickly and cheaply have emerged. For someone preparing their own claim, it’s easy to see how they might be tempted to use one.
Firstly, portals are not a big scandal per se. They may even be a useful tool in the market, but they are just not comparable to proper advice. They’re a tool that self-preparers might be tempted to use and this could lull them into a false sense of security, but the triple threat still applies:
- Value – You have to put information into the R&D claim portal, so the provider can only review what you input. It’s down to you to identify everything that you can claim for
- Time – You have to prepare the R&D claim, so no time is saved, especially when you consider that you can just input your claim information directly into HMRC’s online service.
- Quality – There might be some expertise available to review your work and provide feedback, but this isn’t quality engagement. You’ll probably find the terms of business heavily caveat the risk that the portal provider is exposed to so you are still exposed.
If you’re thinking of using an online R&D tax credit portal and you want my advice: don’t confuse a portal with a full claim service, or with tax advice. Portals just put a claim into the portal’s format. And considering HMRC already has its own online submission service, the portal format can’t be as close to the right format as HMRC’s own ‘portal.’ Upon hitting submit, a portal gives you no instant feedback and when you submit, you do so in the hope that you’ve spotted all errors that could delay or put the claim at risk when scrutinised by HMRC.
If any form of qualified tax expertise is available on the other side, they might look at your submission and provide feedback. But this is not dynamic and isn’t the quality engagement that it should be – a competent person interview conducted by a sector specialist. Nobody to ask responsive questions or prompt discussion to open more avenues of R&D. It’s like buying a piece of CAD software and expecting that your business can put up an entire building. Obviously, you still need a CAD technician and an architect at least before you can do that.
The key to a comprehensive R&D tax credit claim is that they need someone to challenge assumptions. This is best done in person and the very process of reactive questioning ensures everything is considered and you get the support and encouragement that’s simply not possible in a portal.
There are also downloadable templates freely available (which is all a portal is) so what value are they adding? I would go so far as to say there is no place in the market for ‘them’ but technically there is no ‘them’ — it’s just a bit of software. There’s no enquiry support offered as part of the fee, meaning if HMRC ask for more information, you’re on your own.
An R&D tax credit claim is not a compliance exercise where a simple form would suffice. It’s not one-size-fits-all but a portal makes it so. It is so far removed from what a credible R&D tax advice service offers that it’s not comparable in any way shape or form, which is why the fees are not comparable.
Indeed, for the same price, you could engage ForrestBrown’s Tax Advisory Practice, a team formed for just this type of claim rehabilitation. This is a claim review service that draws upon industry experts and submits R&D tax credit claims to HMRC in their preferred format (its own online service).
PCRT – The end of the line for spurious R&D tax credit agents
Businesses who self-prepare can easily fall into the wrong hands when they come to look for help. There are spurious R&D tax credit agents out there who take a knock-down fee and declare they can get your claim done in 20 mins. These agents may appear to help with the administration of your claim documentation, but they are not the answer to achieving the full value claim your work deserves.
It’s important to understand what you’re getting for your money. Good advice costs what good advice costs. The damage that spurious advisers do is real.
This authorised the agent to deal directly with HMRC, and permission for the agent to receive the R&D tax credit on the business’s behalf.
The agent told the business they would receive a £150k claim.
The next the business heard was a letter from HMRC to tell them their claim was in enquiry.
They never got to see what was filed by the agent, it had not been shared with them.
There was no supporting project or financial documentation to substantiate the claim.
The agent emailed the business to inexplicably blame the failure on Brussels and withdrew the claim, in what proved to be a case of fraud.
Thankfully, new Professional Conduct in Relation to Taxation guidelines have been announced which signal the beginning of the end for these agents of poor standing and ill repute.
Good advice – the best way to protect your business from bad advice
If going it alone is still the answer for you, a reputable adviser will offer you flexible support to help you to avoid the triple threat. Contact us if you’d like to discuss which approach is best for your business.