This is currently a very pertinent question as evidence received at the end of 2022 by the Chair of the Economic Affairs Finance Bill Sub-Committee stated: “So far in 2022-23 claims are determined to be inaccurate in 84% of closed 1-2-1 enquiry cases in the SME R&D scheme.”

This is a worryingly high figure but not one that we find surprising.

It’s no secret that there are hundreds of R&D tax relief advisors who are currently offering a pretty poor service due to their own lack of knowledge on the subject and/or a willingness to ‘work the system’ rather than make the effort (and likely lower their profit) by compiling robust and defendable R&D claims.

This type of advisor is one of the reasons that many think that compiling an R&D claim is a quick and easy task.  Whilst some claims are more straightforward than others, there is lot of work that should  be undertaken if a claim is to stand up to HMRC scrutiny.  This type of advisor has been aware that, until recently, there was a pretty low chance that HMRC would actually check the claim so ensuring that it could stand up to HMRC scrutiny was not top of their list of priorities – preparing a claim that would look impressive to their client is usually number 1.

Over the last decade or so, we have reviewed dozens of claims prepared by accountants, R&D Consultants and companies themselves.  The first thing we usually check is whether the project/s meet the criteria for qualifying R&D activity and a lot of the claims fall down here.  Compiling a full claim is much more involved and there is much that needs to be addressed to ensure that the company is claiming the correct costs under the correct scheme, but for this blog, we will just focus on errors which can occur when qualifying a project for R&D tax relief.

A qualifying R&D project is one which is seeking to create an advance within a field of science or technology via the resolution of scientific or technological uncertainty.  The advance must be one which is not readily deducible by a competent professional.

These above 2 sentences may be relatively short but are the source of a number of inaccuracies within the claims we have reviewed which we see repeatedly including:

Advance being sought is not within a field of science or technology.

We often (though not exclusively) see this error within software related R&D claims where the writer has confused ‘field of science or technology’ with ‘industry’.  Many industries are behind when it comes to utilising software within their daily working practices and developing paperless working procedures, online portals to upload/access information, complicated workflow automation etc can be seen as useful advances to a company or perhaps an entire industry but, this does not mean that they represent an advance in a field of science or technology.

With this example, the projects are based in the field of Computer Science but all of the development is standard within this field and so wouldn’t qualify for R&D tax relief unless there was some way in which the development could be said to advance what was already known to be possible within the field of Computer Science.

Advance being sought by someone other than a competent professional.

A competent professional is someone that:

• is knowledgeable about the relevant scientific and technological principles involved,
• is aware of the current state of knowledge, and
• has accumulated experience and been recognised as having a successful track record.

We have seen claims where the competent professional listed is far removed from the field in which the projects are based e.g. a Finance Director and a software based project.

We have also seen claims where the competent professional listed has experience in the right field but not to the degree for which they would be considered a competent professional e.g. an accountant that is part way through a BSc in Computer Science.

Neither of these would be sufficient as a competent professional.

Project outcome being ‘readily deducible’.

A lot of advertising around R&D tax relief claims that qualifying projects are ones that are ‘challenging’, ‘bespoke’ or ‘innovative’.  There are qualifying projects that are challenging, bespoke and/or innovative but it is not these qualities which make them qualify for R&D tax relief.

Many challenging, bespoke or innovative projects do not qualify for R&D tax relief as the outcome was readily deducible by a competent professional.  ‘Readily deducible’ does not mean ‘instantly known’ and it is quite possible that there will be a certain amount of head scratching in the early days.

For example, a construction company asked to renovate a dilapidated building may have no idea how to approach the project upon first sight.  However, once it looked at the individual elements that need work, it is quite possible that the renovation can be undertaken using already existing techniques.  It is only once the project moves above and beyond what is ‘readily deducible’ that it can be seen to be qualifying R&D.

If HMRC are aware of this issue, why isn’t it fixing it?

It is true that in previous years it was possible (and often quite likely) that a claim could be passed whether it was eligible or not.  R&D tax relief claims are made under self-assessment and HMRC has only been able check a small percentage of claims each year which means that many ineligible or inflated claims have managed to slip under the radar.

However, HMRC has been gearing up to combat this ever-increasing problem.  It has taken on new staff, changed its procedures and adopted new methods to identify claims submitted by poor advisors so that it can deal with the problems at source.  It is opening more enquiries and is finding fault with many of these claims which just further highlights how big this problem has become.

If you have any questions on this blog or anything R&D related, please contact us at [email protected].

Posted: 11 Apr 2023