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Markel Tax

07 Jul 2020

Are you doing R&D? – Prove it!

Show the examiner what you know!

Avoid the pitfalls of an ill-prepared claim, and maximise the tax relief to your company

Evidence, evidence and yet more evidence. This message, well-known to us here at Markel Tax, has emerged loud and clear from the recent findings of a First Tier Tax tribunal regarding eligibility for R&D tax relief.

AHK Recruitment v The Commissioners for HMRC is a useful case for practitioners and client alike. It both highlights the crucial role played by the R&D professional and paints a picture of what not to do when preparing and submitting a claim.

Taking this case as starting point, we have used it to demonstrate some guiding principles when looking at a potential R&D claim and how to go about it effectively and compliantly, in line with both legislation and HMRC best practice.

Does the R&D specialist prepare a detailed, relevant report to accompany the cost calculations?

This is a key consideration when looking for a specialist to help prepare R&D claims – will they prepare a narrative report that gives specific details of the R&D undertaken?

In the AHK Recruitment case, whilst the R&D firm in question did prepare a narrative report to accompany their workings, unfortunately for the client, this report failed to go into any relevant detail. Almost unbelievably, they failed to include specific information about the technical uncertainties faced by the company during this period of supposed R&D work. The report simply stated that “various uncertainties had been encountered”.

This level of technical support for a claim is woefully inadequate, and is clearly failing the client. The result of this inadequacy speaks for itself - an initial enquiry by HMRC was opened on 4th March 2016, with the tribunal taking place on 29th November 2019, some three and half years later. During this time, no meaningful progress was made to answer the questions raised by HMRC – essentially, the narrative report raised more questions than it answered, and was the main reason for the case being brought.

When it comes to submitting a claim for tax relief, the onus is on the claimant company to prove that its work qualifies for that relief. This is really a matter of common sense when one considers it – a company wants to claim tax relief for work it has financed and undertaken, with a view to making an advance of some sort. It is only to be expected that HMRC will want to see evidence. Here at Markel Tax, we have always prepared detailed technical reports to accompany our clients’ claims, and we know the value of providing a robust, informed account of the activities undertaken.

It is worth noting here that many firms which profess to be R&D specialists do not submit a written report as part of their claim. There are many who do, and yet do not take the time to understand their clients’ businesses. In the current climate, software tools exist which are capable of creating a generic report full of impressive-sounding jargon and R&D buzzwords, but, as the AHK Recruitment case illustrates, HMRC will see through that approach. To the uninitiated reader, a conflagration of jargon can sound impressive, but ultimately, such a narrative has to have integrity. Experienced professionals will be examining the report and it must be able to withstand scrutiny.

In the AHK Recruitment case, the R&D specialists responded on two further occasions with what they considered to be more detail however, HMRC remained unsatisfied, and responded with:

“Little is mentioned regarding the advances that were required“

Safe to say, this is an example of setting one’s client up to fail – not something we are in the habit of at Markel. Our client relationships are paramount. We firmly believe the devil is in the detail, and only submit claims once we are satisfied that there is an advance and that we can demonstrate that advance to HMRC.

Qualifying or non-qualifying?

At Markel, we know our clients, and that in turn helps us to build a claim in which we have confidence. This approach feeds into the report – if we understand our client’s work, then we can explain how it qualifies for R&D with confidence, and HMRC will in turn be satisfied that the legislation has been interpreted as intended.

It is easy to be distracted by complex terms and a belief that the company must be doing R&D because the work was hard - but in tax relief terms that is not enough. Part of the role of an R&D advisor should be to counsel against spurious or inflated claims that cannot be supported, and to ensure that all evidence submitted to HMRC on a client’s behalf is robust, accurate and reasonable.

Taking the AHK case again as an illustration of how not to submit an R&D claim, it should be noted that in the evidence submitted for the hearing, the advisers provided a fourth narrative report! This sought to introduce a new technical difficulty. Understandably, the Tribunal’s judge asked why this had not been included in any of the previous submission – the response was that the “predecessors did not understand the project properly”. If that is true, one has to wonder why three technical summaries had been provided by people who did not understand the project, let alone wonder why a company which claimed to be professional would denigrate its staff in that manner! Desperate times undoubtedly called for desperate measures.

Beware the scientific and technological ‘experts’

Here at Markel Tax, we have PhD scientists, engineers, biology and pharmaceutical specialists and ex-HMRC Inspectors but, if we need to ask more questions to understand your business and your project, we will. We are not ashamed of asking you the awkward and difficult questions up front; we think it is an integral part of an honest and constructive working relationship. Furthermore, every business is unique. It would be arrogant and downright negligent to assume we could write with authority on a business which you know inside out.

The final point is perhaps the most relevant of all – you are claiming tax relief, a legitimate tax relief yes, but tax relief nonetheless. Prove it!

Evidence

R&D tax relief is available for companies which are involved in innovation, and throughout the UK, this remains a widely under-claimed relief. Many companies qualify and are unaware of that fact, and are missing out as result. That’s why we always say it is worth at least a conversation with one of our consultants. Sitting as we do on the HMRC R&D Consultative Committee, we believe we are in a strong positon to comply with the legislative framework surrounding R&D tax relief, and that we submit robust claims. Clients who are genuinely entitled to relief should feel confident in claiming it, and here at Markel we foster and support those claims.

A final, telling illustration is that in two pages of decision narrative in the AHK case, the tribunal judge used the word “evidence” on eleven occasions, and the verb “prove” ten times. This is a clear indication of where he saw the failings in the claim. It is not enough to state baldly that the technology was ‘an advance in the field’ or that the technology was ‘not readily available’, HMRC requires some actual evidence. This could come from someone involved in the project at the time, or from an independent witness who could make an informed judgement on the different technologies available. The judge concluded that without such evidence there cannot be an R&D claim – which shows that there might have been a successful claim had it been handled correctly, and is a great shame for the company involved.

In conclusion, at Markel Tax we have grown-up, direct conversations about R&D tax relief, and we welcome these types of enquiries and challenges from HMRC. This enquiry into AHK Recruitment’s claim was not controversial or ‘picky’, it was not based on some obscure piece of legislation or grey-area – the Inspector asked for proof of the activities claimed, and over the course of three years neither the company nor the consultant have been able to provide that evidence.

If you engage with a professional R&D provider, you should expect a firm that operates with the highest ethical standards and pushes you to examine the details of the project so that the value of the claim can be maximised and the evidence standards are reached. 

As mentioned above, Markel Tax sits on the HMRC Research & Development Consultative Committee which means that we understand the type and amount of information that HMRC need in order to approve an R&D claim. We also respect your time and the resources of your business, and we think it is much better to ask questions early and get the facts established before any claim is submitted – if necessary, we’d rather spend a few extra hours at the start of the process than three years trying to support something which may never have been a credible claim in the first place.

To talk through your potential R&D claim and how our team of experts might be able to help please call 0333 920 5708 or email James Clark.

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Tagged R&D tax relief R&D tax relief
Next article in series

07 Jul 2020

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