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What do tax leaders need to deliver R&D tax incentives to the most innovative companies in the UK?

The R&D tax relief advisory market is responding to ever-changing legislation, a more robust approach from HMRC, and uncertainties in future policy direction. Last week we hosted a roundtable discussion with Senior Tax Leaders to discuss how these issues are manifesting for us and our clients.

A request for better engagement from HMRC

Around the table, there was a major concern about the recent change in approach from HMRC and their lack of engagement. Enquiry letters are now often written from a central compliance team rather than a named inspector. Responses are automated so claimants, and their accountants, don’t receive the necessary clarifications. Most are struggling to enter into any sort of useful dialogue with HMRC on key issues. Advisors and clients don’t have confidence that they are being heard, without the ability to have a conversation or meeting with HMRC.
It would be more helpful if HMRC could be more specific as to why a claim is in enquiry and the areas they are focusing on. They need to be more collaborative with both clients and accountants so there is mutual understanding and learning.
HMRC need to think past their statistical needs and engage collaboratively with advisors and businesses to get the right answers instead of the convenient ones.

The risk of uncertainty and the impact on investment

The room was broadly in support of HMRC’s role but there was a consensus that current enquiry activity is a knee-jerk rection. There is a suspicion that HMRC aren’t properly resourced for the task at hand and that initiatives to reduce fraudulent activities have been dropped. It seems like HMRC are now driven by the need to gather statistics on the R&D schemes, to get convenient answers rather than the right ones.
HMRC is clearly under pressure and inspectors may not have the knowledge or experience of the R&D schemes.
The new enquiry approach has resulted in some accountants and advisors submitting voluntary disclosures, in effect backdating claims with errors and offering to pay back difference. But often there is no response from HMRC.
This seems to be indicative of the undermining of policy objectives and is creating uncertainty within business. There is a very real risk that this will impact on private investment in R&D in the UK.

Targeting smaller businesses puts grass roots innovation at risk

There was discussion about the return of investment of the SME scheme v RDEC. Where there is some merit in simplifying down to a single scheme, there was concern about the policy objective should be and how this would be achieved. Some believed that the focus would turn to larger, dominant companies at the expense of grass roots innovation. De minimis levels would likely hurt early-stage entrepreneurs and would mean that government would only support the “big bets” through a new RDEC scheme.
It seems that SME clients have been the target of “indiscriminate” enquiries. At this level there is no communication, whereas larger companies can enter a conversation with an inspector. This supports the notion that HMRC are going after smaller businesses.

What does it mean for leading accounting firms?

With 1 in 10 claims going to enquiry, the profession is acknowledging a lack of R&D expertise in some quarters. Some firms are withdrawing claims, based on a lack of argument. Fee protection providers are showing an interest in this area with the potential to refuse insurance to firms that repeatedly go into enquiry.
New managers in many R&D departments are seeing enquiries for first time and are forced to quickly learn the extra level of depth required.
There is a consensus that high street accountants will be forced out of the market because of the cost of handling this volume of enquiries, countered with the risk that they will lose clients if they don’t offer an R&D service. There is a cost of doing this job well, a question of paying to get and keep the specialised talent required.
Although there hasn’t been a change in the definition of R&D – the change is in HMRC’s interpretation and application of the rules. With it comes a change in the perceived risk to R&D claims some firms saw the need to involve specialists at the beginning of the client conversation.

In summary

When we look at the actions of HMT and HMRC many in our industry are asking “what is the prize here?” Overall, Senior Tax Leaders are crying out for clear policy direction that is delivered consistently. This will allow us to get on with our job, supporting the most innovative businesses in the UK.

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