The Self-assessment trap
As the Director of RAndD Tax responsible for compliance I require a meticulous outlook and attention to detail which can lead people’s eyes to glaze over and cause a degree of irritation. One of the things that really irritates me, and sets me on edge, is when I hear someone talking about their R & D tax credits claim being “approved” by HMRC. It is crucial to understand in a self-assessment world that the processing of a claim or payment of a claim by HMRC does not mean approval.
We were approached at the end of last year by a company who had “successfully” claimed R&D tax relief and R&D tax credits for six years on a DIY basis. The most recent claim had been enquired into by HMRC. The resultant enquiry identified a lot of fundamental errors in the claim costs. Items of expenditure that are simply not claimable like rent, and capital expenditure, had been claimed. While items of expenditure that are claimable, like staff costs, had been claimed at levels the company could not justify when faced with questions by an HMRC inspector. They had claimed for example 100% of the annual cost of many staff members.
The outcome of the enquiry was a significant reduction in the level of that years claim. But the sting in the tail was that once they had conceded on that R&D claim, they were asked to look back at the previous six years of claims as well, plus had to defend themselves on the issue of potential fines for basically making inaccurate tax returns. The financial impact of the repayments and potential fines was threatening to the firm’s existence. They had no defence, they had already shown ignorance of the R&D claim guidelines.
This is what I call the self-assessment trap. You can think a DIY/”guideline light” approach to an R&D claim is fine. The chance of any single years claim being looked into is extremely small. Payment breeds confidence and generates reliance after you first discover the scheme. But you can be building up a massive future liability by not taking a serious compliant approach and getting specialist advice.
We could not help this company. They left it too late. I would advise anyone considering making an R&D claim to take professional advice from a specialist from the very outset.
Even accountants will sometimes say to us “R&D claims are easy, I ask my client if he has done any R&D, he gives me a number, I put the number on the return, he gets the money. Why do we need claim scoping’s, documentation, costings, and to pay specialists?” This is so dangerous! Accountants have fundamental ethical responsibilities which include professional diligence and due care-to know their own limitations. If they don’t have training or experience in an area such as R & D tax credits claims they should not give advice on it. But they and companies often fall into the self-assessment trap and feel because they are getting paid they are claiming correctly.
We work with many accountancy firms who recognise the importance of the “right tool for the job” when helping clients with R&D claims. Their clients have benefited immensely. They create claim supporting documents and records, which mean they are prepared for HMRC questions and have our experience on hand to help answer them. It simply makes sense to employ a specialist.
Chris Toms, Director RandDTax