Navigating the changing R&D landscape

Navigating the changing R&D landscape

Data gathered by the Fee Protection Insurance team at Markel Tax shows how HMRC is changing its approach to R&D claims.

Change is afoot at HMRC. After a period in which it concentrated its resources on dealing with the fallout of the pandemic, the department has signalled a renewed focus on research and development (R&D) claims. They have recruited 100 new inspectors with the aim of cracking down on aggressive and incorrect claims made on behalf of businesses by unregulated agents.

Data pertaining to R&D claims gathered by Markel Tax’s Fee Protection Insurance team over a similar period sheds light on how HMRC’s approach has changed, says Giordano Goggioli, senior associate at Markel Tax.

The first thing to note, says Giordano, is that “year on year, between 2020 and 2021, HMRC have increased the volume of its enquiries into R&D claims by a factor of six – so approximately 600%.” This effort shows a real desire to revert a noticeable trend in continuous growth for the last few years. In fact, HMRC estimate the costs to the taxpayer due to Error & Fraud in the R&D tax sector to be of £469m in 2022, a 50% increase relative to the 2020 estimates.

Not just the big-ticket items

The value of claims that HMRC are willing to investigate is also interesting, Giordano notes. “Historically, HMRC have mostly been interested in R&D claims that are in excess of six figures. More recently, however, our data shows that it is quite willing to pursue values that are really quite small.”

“Last year, the smallest enquiry that someone came to us for help with was worth just £9,000. If you’ve spent any amount of time in the sector, that’s quite interesting. It shows that HMRC typically being interested in ‘big ticket items’ is no longer a safe assumption.”

Markel’s data also sheds light on what ‘entry points’ HMRC are most commonly using to scrutinise R&D claims, says Giordano. “R&D claims are generally based on two main pillars: the cost analysis and the technical project description,” he explains. According to the data, it’s the latter that HMRC tend to target the most. “They’re looking closely at whether a project is seeking to achieve a genuine advance in the fields of science or technology. This presupposes an understanding of the scientific or technological baseline in the sector. Without that, it’s impossible to articulate any advances.”

What does this mean for accountants?

HMRC’s targeting of the technical project description is a problem for accountants, says Giordano, because they typically don’t have the technical expertise to verify what is and isn’t genuine R&D, which leaves them “a little bit at the mercy of the client”.

Markel Tax and other R&D specialists, on the other hand, have “individuals with specific sector knowledge”. As a result, “they’re able to determine the baseline in the sector and what does and doesn’t qualify as R&D. The effect is that it de-risks the claim, and that the right people claim the right amounts for the right activities” he adds.

Giordano recalls a recent example where HMRC had investigated a drinks manufacturer which had claimed that mixing different flavours of drink together to achieve new flavours amounted to R&D. “The basis of that claim shed the spotlight on the wrong aspects of R&D. Upon further analysis, we recognised that the case was eligible from a scientific perspective, and found that the way the chemicals of the drinks interacted affected things like the viscosity of the drink and its shelf life, so the project was indeed seeking to achieve a scientific advance in the field. Unfortunately, the client and their accountant were looking for it in the wrong places.”

A proactive approach

The upshot, says Giordano, is that “accountants can’t afford to be reactive about this.” Waiting until a client approaches with an R&D claim is “a losing position”, he says. If an unqualified provider gets there first, perhaps offering an unreasonably low fee or short turnaround time, “you’ve lost the business and put your client relationship at risk”.

Instead, accountants should be proactive, he says, by systematically reviewing their client portfolio. “That way, you can identify potential opportunities for an R&D claim (and other tax reliefs) before anyone else does, and take control of the process rather than being a victim of it.”

Of course, this approach requires capacity, both in terms of time and technical knowledge. That’s where specialists like Markel Tax can help, says Giordano. “This is a true partnership model, where accountants put the trust in us to be an extension of their practice and deliver real value for them and their clients.