An increasing number of accountants are looking to partner with Source Advisors to provide a compliance-led, technically rich, R&D tax relief offering to their clients. There is sometimes a difficult conversation to be had when we feedback that, for some of their clients, we can’t provide this service. It can be a challenge for the client and the accountant to hear so here I explain the reasons we sometimes need to decline clients, and why it’s in the best interests of you and your clients that we do. It’s because of our strong working relationships that we can be frank with our partners, and accountants should welcome our fresh thinking and honest opinion.
Increased HMRC scrutiny of R&D tax relief claims
By now, most accountants are aware of the changing landscape of R&D tax relief. Due to perceived fraud and error in the scheme, HMRC has significantly increased scrutiny of R&D claims for over a year and has been opening enquiries into claims at much higher levels than seen previously.
During a recent House of Commons session, it was stated that the number of people in HMRC working on R&D compliance is over 500, which if accurate, is a resource that has quadrupled since 2020 and suggests that the current level of scrutiny is here to stay and could increase even further.
Whilst we welcome the focus on accuracy and compliance, the increased level of time-consuming enquiries, and the level of evidence required to defend those enquiries, mean that businesses are understandably thinking twice about making an R&D tax relief claim. We don’t want clients and their accountants to be deterred from making a claim, but instead, they need to have the appetite to go through a compliance check confident in the knowledge that it makes commercial sense.
Previous R&D tax relief claims may not reach our threshold
Businesses that have historically made claims themselves, or used a less-rigorous advisor, now need to reflect on whether their activity could withstand the scrutiny of HMRC. Clients may have heard phrases like “approved methodology” or that claims have been “accepted by HMRC” which are meaningless in the current environment. We regularly have conversations with clients who believe they are eligible to claim, and we must explain that we don’t believe this is the case. This isn’t a new conversation for us, we’ve always held our work to the highest standards of proof even if a client has claimed R&D tax relief previously or has been told elsewhere that their projects are qualifying. Compliance needs to be front and centre, and we will always refuse clients who we don’t believe their R&D activity is robust and defendable. It’s important that we do refuse these clients, whatever claims have or haven’t been made previously.
The commercial consideration of making and defending an R&D tax relief claim
Smaller claimants invest time and resource in providing us with the detail of their compliant activity, but there also needs to be an acceptance that if their claim goes into enquiry there will be demand for significantly more time to deep dive further into evidencing their compliance at an even more detailed level. Although we provide a full support service and liaise with HMRC if a claim that we’ve prepared goes into enquiry it is true to say that there will be effort required by the client.
For time-poor SMEs, the potential commitment of additional hours can be something they don’t feel comfortable with. Unless claimants are committed to the process and have an understanding and acceptance of the challenges they may face, it may not be appropriate to make a claim at the outset. Filing a claim and then not having the time to defend or the evidence to support activity undertaken, is a difficult position for everyone involved. So that’s a conversation we have at the start of the journey rather than the end.
Bringing our experience to the decision to proceed with a claim
There is no doubt that many R&D tax relief claims that have gone into enquiry have subsequently been withdrawn due to the business questioning the commercial viability of pursuing a defence or possible appeal. They may be confident in their compliance, but not have the appetite or time to undertake a protracted debate with HMRC defending their position, or even have the appetite to push back on HMRC at all.
In the current R&D landscape, it is better for us to refuse clients at the outset, than have to withdraw a claim due to a lack of appetite, resource, or time, when it finds itself in enquiry. We may ask more questions at the start of any claim around appetite for the wider process, to protect the client and their accountant, and ensure everyone is aware of all possibilities. In some circumstances, we may need to say we’re not able to support a business, and it’s in everyone’s best interest that we do.
And if your current R&D advisor has never had that conversation with you, then perhaps find out why not. Better to know where you stand from the offset.
