R&D: A Guide for Accountants

R&D: A Guide for Accountants

If you're an accountant, there's a lot to think about when it comes to R&D. Through this guide, we'll set out why it's important, how the landscape is changing, and how you can make the most of the opportunities it presents. 

The policy landscape for research and development (R&D) tax relief has been shifting in recent years. Amid losses of more than £1.1bn revealed in its latest annual report, HMRC have ramped up its efforts to crack down on fraud and error in R&D claims, more than doubling the number of staff working on compliance in the last three years. This stance has drawn criticism from the Chartered Institute of Taxation (CIOT), however, which said in a recent letter to the body that its “volume approach” was unfair to legitimate claimants and was causing “a breakdown of goodwill and trust.”

Meanwhile, new legislation introduced by the government has changed the requirements of making an R&D claim, as well as how much businesses can claim, and detailed plans to simplify the system remain unconfirmed.

Through this guide, we’ll set out why R&D is vital; how the landscape is changing; what opportunities the landscape presents for accountants; and how they can make the most of them.

What are R&D credits, and why are they vital?

The idea behind offering tax credits to businesses carrying out R&D is simple: innovation should be rewarded. If incentivised to spend time researching and developing new technologies and processes, businesses are more likely to remain competitive and boost the wider economy.

This idea became a government focus in the UK in the 1990s, and the first R&D tax relief scheme, available to SMEs, was introduced in 2000. Two years later, a similar scheme for larger companies was added.

Since then, while changes to both schemes have been introduced, the two-scheme system has remained in place. Plans to merge the schemes are under review with draft legislation being unveiled in July 2023 following consultation with industry stakeholders.

Part 1: A changing landscape

Legislative changes

The process of claiming R&D has been subject to several changes recently; some that took effect from 1st April 2023, and others that kicked in from August, says Adam Ellerington, Senior Tax Manager at Markel Tax.

The first change, concerning the rates of relief available from both schemes, came into force in April. “For SMEs, the rate has been reduced by a third, while the RDEC scheme (for larger businesses) has been increased by 53%. Whilst the SME scheme remains the more generous, the gap between the two schemes has narrowed considerably ”, says Adam. For now at least, SMEs can’t claim as much as they could before, which has drawn criticism from start-up businesses.

The government has also broadened the scope of what types of R&D expenditure can be claimed, whilst the definition of science and technology has been widened to include pure mathematics. “Companies can now claim for a wider range of IT costs, including cloud hosting and data used for R&D purposes.” Earlier plans to restrict subcontracted activities to UK-based entities, making overseas work ineligible, are now expected to be implemented from April 2024.

In August, administrative changes to the way R&D claims are filed came into force. “All claims, regardless of year end date, now need to be filed through a new online form”, says Adam. The changes, which are an attempt to standardise the information required to support each claim, mean that some companies may need to provide “a much higher level of detail” than was previously necessary.

Companies are now also required to include a named internal R&D contact who will take responsibility for the submission, and must therefore have a strong grasp of its details, and any accountant or third-party agent preparing the claim will need to be disclosed on the submission. “It’s clear that HMRC want greater involvement from claimant companies’ accountants and R&D providers in their submissions”, says Adam. “With a named contact being required, if a client is using a third-party R&D agent, it’s essential that the accountant has full oversight of the claim.”

This move to mandate a named contact is in part a response to the surge in R&D providers entering the market, which has historically been unregulated and under-policed. These providers may suggest that an R&D claim can be submitted quickly for an unrealistically low fee, but in the event of an investigation by HMRC, they may not have the knowledge or experience to deal with it – leaving the business the claim was made on behalf of exposed.

HMRC’s compliance drive

Alongside these legislative changes, HMRC have been ramping up its scrutiny of R&D claims to unprecedented levels.,

In the wake of the pandemic, HMRC have shifted their focus towards compliance, partly in an effort to recover some of the losses sustained from abuse of the Coronavirus Job Retention Scheme, or furlough. R&D tax relief has also been singled out as a particular area of concern because of the scale of losses arising from it, revealed in HMRC’s latest annual report to have reached £1.13bn, or 16.7% of claims.

“HMRC’s specialist R&D team focused on SME compliance has more than doubled in recent years in response to growing levels of fraud and error”, says James Cordiner, Tax Investigations Manager at Markel.

Historically, HMRC would generally only investigate ‘big ticket’ R&D claims. More recently, however, “the value of claims being investigated has drastically decreased”, says James. “We’re now seeing investigations into claims worth only a few thousand pounds, with less than £500 in tax at stake”. The assumption that small claims won’t be investigated is no longer a safe one.

Volume approach

HMRC have also come in for criticism recently over its changed approach to R&D claims, which the CIOT likened to “throwing the baby out with the bathwater”. The body has been accused of “stonewalling genuine claimants” and contradicting its own guidance by, for example, treating claimants’ behaviour as careless even when advice has been sought from a third party.

HMRC’s pursuit of more claims, including lower value ones, has altered the balance of viability for some companies, who are finding that the effort of making an R&D claim and the risk of an investigation now outweighs the financial incentive the tax break offers. Markel’s insurance data predicts that by the end of 2023, investigations into R&D claims will have risen by a staggering 900% from the levels seen in 2019.

Part 2: Opportunities for accountants

The R&D landscape is more complex than ever, but with the right approach, it offers opportunities for accountants. But what do they need to be aware of, and what steps can they take to make the most of these opportunities?

Spotting opportunities

There are various clues to keep an eye out for that might indicate a client could benefit from making an R&D relief claim, says Giordano Gogglioli, Senior Associate at Markel Tax.

“The most obvious sign to look out for is if a client is discussing a high-tech project – something that involves software engineering, for example – or if they’ve recruited someone with a technical skillset like a developer, either on payroll or on a subcontracted basis. Less obviously, if a client mentions constraints or areas of technological uncertainty that they’ve had to work through, that’s worth discussing, as it might have led them to invest in R&D in pursuit of a solution.”

Identifying genuine R&D work

Whilst the interpretation of the definition of R&D can be subjective, HMRC say that R&D takes place where a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. “Seeks” is key – projects that fail can still qualify, and in fact, evidence of previous failure is a good indicator of genuine activity.

“The difficulty for accountants is in identifying what is genuine R&D without sufficient technical sector knowledge in-house”, says Giordano. Therein lies the advantage of working with a partner that can offer in-house technical expertise and knowledge of the R&D claims application process.

Opening up conversations

To move the R&D conversation forward, accountants should position themselves as “catalysts for business value”, says Giordano. If no opportunity has presented itself, desk-based research into a client’s activity might help – often known as a file review. “You can then be upfront and tell the client you’ve spent some time thinking about their business, and tell them about the potential for an R&D claim if you’ve found one.”

It's also worth making clients aware of the reasons why the cheapest provider of R&D claim support is unlikely to be the best option. “A proper R&D claims support operation requires expertise, whether that’s researchers, trade professionals, or even former HMRC inspectors. That has a cost, and cheaper providers will have had to make concessions somewhere along the value chain”, says Giordano. “Given HMRC’s aggressive pursuit of R&D claims in recent times, cutting corners can result in much greater costs later on in the process.” With more scrutiny being applied by HMRC to claims, it is more important than ever to check whether the fee also covers the defence of any such enquiries, or whether this is charged separately.

Reviewing existing claims

Given HMRC’s recent ramping up of enquiries into R&D claims, taking the time to review existing claims is often a worthwhile endeavour as an accountant, whether the claim was submitted by a third party or done in-house, says Duncan Edwards, Incentives and Reliefs Senior Manager at Markel Tax.

“Claims need to have the correct supporting documentation in the correct format. If a claim has been written up from a commercial viewpoint, it needs to be done from a technical standpoint to comply with HMRC guidelines.”

For accountancy businesses without the in-house expertise to write or verify technical details, partnering with a business that can offer that is a sensible approach in the current R&D landscape, says Duncan, given that HMRC can and will draw upon specialist knowledge in reviewing claims. “If a reputable third-party R&D provider has already been involved, the claim may already be valid. If not, a partner can support in verifying claims and advising which parts might need to be withdrawn. In order to safeguard your practice and your clients, it’s best to be sure.”

Without proper advice and support, claimants have increasingly been choosing to withdraw their claim entirely in the face of increased scrutiny from HMRC. Not only does this mean that legitimate claims are being withdrawn for no reason, but sometimes withdrawal can lead to a penalty, too. Instead, accountants – supported by a partner – should encourage their clients to make an informed decision on their claim.

Building a risk-free partnership

Partnering with a provider like Markel can remove the risk from the R&D claims process, says John O’Donnell, Partnership Manager – Incentives and Reliefs at Markel. “We work as an outsourced part of the accountant’s tax team.”

Markel offers full support every step of the way, beginning with the file review. “These work really well for opportunity identification. Accountants can use them to be proactive with clients and control the conversation, while we do the heavy lifting.”

Markel’s tax and sector-specific technical experts can help with reviewing claims, as well as the process of submitting them. “If a client doesn’t quality for R&D tax relief, we’ll tell them and their accountant why. The accountant can then show that they went through the proper process of ruling the claim in or out, which is more important than ever as accountability is increased”, says John. If HMRC do launch an enquiry, Markel will defend it at no extra cost.

Key to a successful partnership is the idea of supporting, not competing. “We work in a collaborative way, and the accountant remains in control. We won’t be pitching for other work or doing anything the accountant doesn’t know about.”

Picking a partner

As the R&D landscape in the UK continues to evolve, “it’s more important than ever for accountants to pick a reputable partner with the technical expertise needed to put together a robust claim that will stand up to HMRC scrutiny”, says Justine Dignam, Director of Incentives and Reliefs at Markel. “We’re here to help you and your clients make the most of the opportunities that R&D relief offers.”

Learn more about R&D, or to explore a risk-free partnership: R&D tax relief