The Good, the Bad and the Ugly – Navigating R&D tax services
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Research and Development (R&D) has become a hot-button issue once more in recent months – this time for its potential successes and pitfalls with the services that innovators receive.
Since their introduction for small and medium enterprises (SMEs) in 2000, R&D tax credits have been lauded for their efforts to promote innovation by businesses of all sizes.
However, they have also been criticised for the complex regulations surrounding eligibility and the very definition of the term ‘R&D’.
In part because of improper use of the tax relief scheme and also down to the rapid growth in claims made through the scheme in recent years, the Government have made a series of major changes to the scheme in 2023 – not least its most recent announcement of a merger of the SME and R&D Expenditure Credit (RDEC), which will take effect from April 2024.
With regulations changing once more, business owners have struggled to keep up and typically are turning to their accountants for help with working out whether they should submit a claim and how to do it.
The issue with R&D
As private companies and the Government target innovation and long-term partnerships, R&D has become a buzzword for companies broadly ‘doing something new’.
Which brings us to the major issue with R&D tax reliefs and services that assist with claims – the definition of the term is broad and the checks by HMRC for businesses have been minimal.
HM Revenue & Customs (HMRC) advises that companies can submit for tax relief if they are working on a “specific project to make an advance in science or technology”, which cannot be in the field of the arts, humanities or social sciences.
In addition to meeting these criteria, businesses must be able to explain how their project:
- Seeks an advance in the field
- Overcomes a scientific or technological uncertainty
- Tries to overcome the scientific or technological uncertainty
- Cannot be easily worked out by a professional in the field
This may seem like detailed guidance, but the definition is broad enough that the Government estimates payments for non-compliant claims are in the region of £1 billion. These figures, when first announced earlier this year, caused a shockwave that resulted in proposed changes to legislation, House of Lords enquiries, changes in HMRC’s management of the scheme and ultimately have brought about several structural changes phased across this year and next.
HMRC’s more stringent rules are leaving many businesses turning to their accountants for advice – but not all services are created equal.
The Great and Good
To start with, let’s look at what a good R&D tax service looks like.
Expert advisors in R&D tax relief have a solid understanding of eligibility, preparing a claim and ensuring compliance with evolving regulations.
There is a strong movement towards advisors adopting technology to enhance their service, expertise, and quality control. Employing technology may include using selective automation, sharing data through the cloud to allow for maximum collaboration with clients, and effective risk management features that provide guard rails and reassurance that a claim will stand up to HMRC checks.
Why Good is no longer Good Enough!
Good accountancy firms will want to ensure their clients are being fully serviced and often, will want to retain this advice in-house.
With specialist providers leaving the sector due to the raft of change, many businesses who were previously using specialist’s services will be approaching their existing accounting firms for advice – and they will want to oblige.
Whether an accountancy firm is new to R&D tax advice, or they already have an established operation, the ambiguity of some of the guidance on what qualifies for relief from HMRC continues to be a challenge.
It’s vital that firms have confidence that they can provide specialist knowledge of the process and ensure claims are accurate and compliant, especially given the changing legislative landscape.
However, up until recently, a firm may have been able to support clients but may not have been backed by robust processes or the requisite knowledge of complex regulations to make a successful claim for more complicated cases. And this can present a problem for firms and for clients.
The Ugly side of R&D tax relief
The changing regulations around R&D tax benefits seem to be forming a vicious circle.
The more difficult it is for accounting providers to stay updated, the more tempting it can be for clients to seek external support elsewhere or indeed for the accountant to seek external help through outsourcing to third parties.
As demonstrated by HMRC’s own analysis of the market, there are certainly providers out there who are intentionally stretching the definition of R&D or advise clients to submit entirely false claims, and often it’s their accountant who is left to pick up the pieces following an enquiry.
Utilising third parties also increases the risk of clients being tempted away to another provider for their other accounting and tax needs.
We are certainly seeing a trend, set against the changes to legislation and HMRCs new behaviour, to move away from outsourcing and for firms to find ways to bring these services back under their own control.
Transforming these operations
This is where our solution steps in to support those firms who want to give accurate, compliant advice and help clients maximise their tax efficiency, but lack the specific expertise.
It’s possible for accountants that don’t specialise in R&D tax reliefs to offer an in-house service on par with specialists – if they use the right technology and support services.
Our R&D tax claims software has revolutionised the way that our clients operate, providing a structured framework that helps produce robust, quality claims.
However, it goes beyond this simple service to provide a fully comprehensive solution. In our experience, we’ve found that accounting clients need five things from their R&D tax claims infrastructure:
- Scalability – the ability to expand their R&D offering without having to bring on additional resources immediately.
- Innovation and automation – a solution that delivers a faster, cost-effective service that improves quality control.
- Training & support – a system designed by experts that provides built-in learning tools and access to a live Advice Line to ensure that the client always has access to up-to-date information.
- Risk management – the tools needed to screen clients and review claims before submitting them to HMRC.
- Real-time collaboration – track claims and access data from anywhere at any time.
A solution that meets these requirements is crucial to helping accountants provide a compliant service that achieves their clients’ goals.
We help accountancy firms looking to provide a top-tier R&D tax service to clients for the first time, or those who are looking to improve the efficiency of their existing service and keep on top of changes to legislation. In both of these cases, our customers are competing successfully with the specialists and are able to keep control of their client relationships and add genuine value.
If you want to find out more contact our team today.