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Markel Tax

05 Feb 2021

Changes to R&D legislation combined with a post-pandemic economy: A time to be vigilant

One of your clients receives an unsolicited call from a firm claiming to be experts in R&D tax relief. The unsuspecting client discovers that they are, in all likelihood, missing out on a cash repayment from HMRC relating to their R&D expenditure. It  doesn’t matter that the client staunchly maintains that they don’t think they undertake any qualifying R&D activity, the caller is relentless.

Eventually, the client mentions that they have bought an off-the-shelf telephony system for £85,000 or perhaps reveals that the company has invested in new stock and materials due to a planned expansion. The caller makes the most of this information and proceeds to convince your client that this in itself can qualify for an R&D tax relief claim.

A claim is duly submitted to HMRC for a standard product that has no associated R&D activity, on the say so of a cold caller who conducts very little, if any, due diligence and knows hardly anything about your client. Despite this cavalier approach, a claim is now in existence and your client is hooked in.

The claim goes through and the client is delighted.

So far, so familiar. Whilst this scenario is frustrating to both R&D specialists and trusted accountants alike, it has become accepted within business circles that certain firms will always prey on vulnerable clients.

However, with recent changes to UK legislation, the situation described above appears even more fraught with disaster for companies which go, unquestioningly, if not exactly merrily, down this road.

As the UK is still in the midst of the Covid pandemic, never mind emerging from it, the government has already acknowledged a necessary stringent approach to public spending. There will naturally be a resistance to increasing the rates of corporation tax or income tax in an attempt to reinvigorate the battered economy. So where can HMRC look to claw back revenues? And in as low-profile a manner as possible? As has so often been the case in the past, attention will focus on the more niche areas of taxation - non-residents, overseas corporations looking to benefit at investing within the UK, and  R&D tax relief.

New measures to the Finance Bill of 2021 with regard to R&D Tax Credits have been proposed and are set to become law with regard to accounting periods beginning on or after 1 April 2021 – meaning advisers and their clients have three months to understand these changes and duly incorporate them into forthcoming claims.

Anti-fraud measures will limit the amount of R&D tax credit a company can claim – the new amount of any such claims can be no higher than:

  • £20,000 plus

  • 300% of the claimant company’s total PAYE and National Insurance contributions (NICs) liability for the period

There are some exemptions to this restriction and these are concerned with Intellectual Property and the amount of qualifying R&D expenditure which is spent on sub-contractors, externally provided workers or connected persons.

The implementation of these benefits will assist the Treasury in rewarding companies which are undertaking R&D within the true spirit of the legislation, and the exemptions are designed to ensure that companies which are engaged in genuine R&D activities are not excluded from receiving a cash benefit in the form of tax credits.

We at Markel Tax are committed to maximising our clients’ R&D claims and to ensuring that these claims are robust. Whilst we will continue to examine the qualifying criteria in increasing detail, the cold-calling firms will undoubtedly continue with their often flippant approach to the system. The changes to the legislation will serve to ensure that any comeback from HMRC is harsher than ever.

It is at this point that spurious claims such as the example given above will begin to be queried more rigorously – and clients will suffer. It’s clear that businesses need to proceed with as much caution and prudence as possible.

An R&D submission forms part of a company’s overall self-assessment and, ultimately, it’s the company and its directors who will be held accountable for any wrongful claim. Should the claim be challenged and fail under the scrutiny of an HMRC enquiry, it will not be the cold caller who takes responsibility.  One should also be mindful that HMRC would almost certainly cast their net back as far as possible – perhaps as far as the first claim of R&D tax relief made by the company - to ascertain whether a similar inappropriate approach to claims had been adopted historically. At a time where survival and recovery is at the forefront of most directors’ minds, the reality could be very different.

At Markel Tax, our advice to our accountancy partners is always to urge their clients undertake their own due diligence if they are engaging with an R&D professional outside of their existing accountancy and taxation relationship. Any professional worth their salt will be able to comfortably answer questions along these lines:

  • How experienced are the providers, do they have a proven track record?

  • Would your accountant, your trusted adviser, recommend them – have you asked your accountant about R&D?

  • In the event of an enquiry, will they defend you without further fees?

  • Have they taken the time to craft an accurate, detailed technical submission to support the R&D claim?

It seems incredibly unfair that thousands of UK businesses are genuinely missing out on R&D tax relief and yet we are seeing a growing number of what are essentially false claims being submitted by R&D providers looking to exploit this generous tax relief without adhering to any form of code or guidance.

HMRC’s approach to genuine R&D tax relief claims does remain a positive and welcoming one. Since the onset of the Covid crisis, HMRC have demonstrated its commitment to R&D tax relief and has redeployed additional resources to its specialist R&D team. In addition, a late submissions team has been created – this is a group directly responsible for ensuring any claims that have not been processed within the pledged turnaround time are prioritised to ensure prompt payment to companies where appropriate.

At Markel Tax we have a 100% success rate to date (January 2021) and successfully submit over 750 claims a year. This is made possible by a team of highly experienced in-house technical consultants with science and technology backgrounds covering a large number of sectors. The team is widely qualified, with many staff holding PhDs and degrees across a range of sectors, along with our finance professionals with CTA, ATT, ACA and other accounting/tax qualifications.

If you have any further questions or concerns, please do not hesitate to contact Justine Dignam or call Markel Tax on 0114 2364 457.

Tagged R&D tax relief
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