Knowledge and Experience of the R&D Tax Scheme
At RandDTax we have helped over 771 Companies gain more than £57 million in benefit from the R&D Tax credit and relief scheme in the last five years. We are experts. The question occurs – is it worth paying for expertise? Can a company do it themselves, perhaps with the assistance of an accountant, and save on the fees paid to a consultant? I have already talked about the risks around self-assessment. That fundamentally claiming is easy, but claiming in the correct way to ensure your benefit is not at risk from enquiry is a bit more complicated (See Part 1). Claim documentation is vital. As is what HMRC would consider the claimant’s “competent technical professionals’ ” understanding of the guidelines. A good consultant’s input in these areas is crucial.
It is often considered that the claim calculation side is more straightforward. However, our experience suggests that clients who claim without knowledgeable advice often miss out even in this purely calculation based area as some accountants misunderstand the rules, through inexperience or lack of current knowledge, or claimants who internet research the area misunderstand the process.
In the last month alone, working with new clients, we have seen;
- A company which had previously claimed R&D relief, without a specialist, and had not been aware an R&D Tax Credit in cash could be claimed. They had simply increased their carried forward losses by claiming, the crucial decision of “should I surrender my losses for a cash tax credit?” was not discussed. The tax credit would have been worth c. £40k and by the time they came to us it was out of time to reverse the “decision”. This was not really a decision at all as they were not aware of the options. Three years later the loss created has as yet had no value in terms of tax relief and is unlikely to in the near term unless the firm’s profitability increases to the point where a current years R&D claim does not offset corporation tax completely. They created an arguably worthless benefit and lost a £40k benefit.
- A new client’s accountant who questioned our method for calculating an R&D tax credit. The accountant said they had done many claims and “knew” we were wrong. They simply took the tax credit at the relevant rate from any loss created directly by the R&D deduction. So if a firm had a £100,000 loss and the effect of the claim was to increase this by £130,000, the client could surrender £130,000 for a tax credit worth 14.5% of this number. They “knew” what they were doing. We had to refer them to the relevant act of parliament and guidelines, CTA 2009 1055 (2). In fact, the credit is calculated on the lesser of the loss plus the enhancement in this example £230,000, and the qualifying costs multiplied by the enhancement rate 230% in this example conveniently also £230,000 (Given a £130,000 deduction £100,000 will already be expensed (Although you really do need to talk to an expert if intangible assets are involved). So in the example calculation doing it the wrong way would have cost the client £14,500.
These mistakes and many others are not uncommon based on what we see with unsupported claims.
It is not simple. Even something as simple as the correct enhancement rate is often not applied. Non specialist do not follow changes in the law, guidelines, or HMRC interpretation. These are constantly evolving. Working through this information is not straightforward the CTA 2009 (Corporation Tax Act) which I quoted earlier for example contains both important primary reference laws on the R&D regime but also talks about R&D thresholds, PAYE caps (Except for the newer RDEC), Intellectual property, and other “rules” long since removed, in 2012. We often see accountants who are not up to date still applying these sections.
I don’t want this article to sound like it is knocking the accountancy profession. Accountants have a lot to do, are often kept on a very tight leash by clients in terms of fees and timescales. To expect all of them to have expertise and time to research a very niche area of taxation is simply unreasonable. Rules do exist around certain reserved areas of accountancy, external audit, insolvency, and investment business, backed by Acts of Parliament and regulation, where you cannot act without further qualification. While this is not formally the case with R&D specialism makes sense in terms of the risk and potential cost of getting things wrong. We successively support a large number of accountancy firms and clients just see our testimonials.
Chris Toms, Director RandDTax