Contrary to what may be your first thought on reading the headline, this is not a ‘blaze of glory’ resignation post. I love my job, and I love my team, they’re brilliant and great at what they do.
But the comment (albeit made in a slightly tongue-in-cheek fashion) is an important point; we’re not competent professionals and it’s important our clients know that. [Note: I’m not saying we’re INcompetent either – although people’s opinion of how far along the scale I am might differ… 😊]
The thing is, when it comes to R&D tax relief, we’re not supposed to be and it’s not possible to be. And here’s why.
The R&D tax relief rules contain the notion of “a competent professional”. They don’t, however, define that term. Instead, they state that qualifying R&D for tax purposes can occur when:
“knowledge of whether something is scientifically possible or technologically
feasible, or how to achieve it in practice, is not readily available
or deducible by a competent professional working in the field”
The recent R&D tax case (HMRC vs. AHK Recruitment) highlighted the importance of ensuring that the company making the claim:
- Has a competent professional;
- Knows who that competent professional is; and
- Ensures that their competent professional is responsible for deciding what is and isn’t R&D, according to the rules.
Most companies I speak with are more than comfortable with (a) and (b); it’s normally a “Head of Engineering”, “Development Lead”, “System Architect” or “Founder and MD”.
When it comes to (c) though, they start to get a little nervous; after all, isn’t that what they’re paying us for?
The answer is ‘sort of’. When I talk to my clients, I (and my team) will absolutely explain what R&D for tax purposes is, and what it isn’t. We’ll provide industry-specific examples of what has been successfully claimed for, and what hasn’t. The purpose of this is to achieve (c) – that the company is comfortable assessing its own activities.
If that sounds a little slopey-shouldered, consider this analogy.
Imagine you want to sell your house. So, you appoint an estate agent. What happens if they not only explain to you the current market conditions and suggest a range of guide prices, but then make the decision about what to put it on the market for and what level of offer to accept, without any input from you.
Would you be happy with that service? It’ll likely come down to whether their assessment and yours matched. Likely, you’d question whether the sale had taken place with your best interests at heart, or the agent’s.
When it comes to advice for R&D tax relief, it’s a similar relationship. As agents, we (should) represent your best interests. It’s not our job to say “this qualifies” or “we’ll claim this”, and it becomes dangerous for claimants when R&D advisors assume the mantle of being the competent professional.
HMRC vs. AHK Recruitment Limited
The full decision runs to 21 pages, and can be found here if you really want to get into the detail but, assuming you don’t want to read all of that, I’ve cantered through a brief summary of the case below.
The company made R&D claims for two periods, for qualifying expenditure totalling approximately £300,000 across both years – so not a huge claim, but not insignificant either.
After what can only be described as a convoluted back-and-forth between HMRC and – at various stages – the company, its tax agent and its R&D advisory firm, HMRC denied the claims. Importantly, these claims were denied not because HMRC disputed that the activities were within the definition of R&D – instead they were not supplied with evidence to allow them to agree that they were within the definition of R&D.
The company appealed and took it to the First Tier Tribunal. There, the company gave evidence through its R&D advisor alone – without testimony directly from the company or indeed anyone who worked in a field similar to the one the R&D activities were being claimed in.
The Tribunal found that the company hadn’t proved that they were doing R&D. Most notably from the decision:
“We are not willing to accept the assertions made by [the tax agent] on behalf of the Appellant”
“We do not attach weight to their assertions as to what technology was and was not readily available during the relevant periods.”
That is to say that the judgement specifically called out the R&D advisors as not being the competent professionals. As they were not contemporaneously involved in the project and neither had sufficient background in the sector relevant to the claim, their testimony was discounted.
Is it time for regulation of the industry?
A Google (other search engines are available) of “R&D tax relief” brings up a number of firms who quote one or more of a scarily common list of reasons why they should be the one chosen by a company looking to make an R&D tax relief claim. But behind the impressive-sounding headline, there’s a murky number of shades of grey – and all may not be as it seems.
“We have a claim success rate of 100%”
Are those claims all agreed in full? Or have they agreed it at a lower value than originally claimed? It might sound semantic, but it can be a very important difference.
“You’ve got nothing to lose”
What about your wider relationship with HMRC? If you overclaim, and HMRC aren’t comfortable that you did so in good faith then penalties can apply – up to 100% of the amount that you claimed for. So you could actually lose quite a lot – and you might not be able to afford to.
“Let us tell you whether it’s R&D”
Only the competent professional can make this judgement. The courts have stated that we, as R&D advisors, are not competent professionals.
I’m a Physicist by background, and have spent a number of years working as a research scientist in the fields of aerospace & defence and medical technology. But, in a courtroom, I wouldn’t feel comfortable holding myself out as a subject matter expert on any of those three topics. The pace of technological change means that practitioners’ knowledge gets dated relatively quickly.
Instead, I and my colleagues use our backgrounds to talk to clients in language they understand and to demonstrate that we’re not just spreadsheet wizards (even though we’re that too). Our background ensures we get the level of detail we need from our clients through questioning, to help them get comfortable enough to make the assessment of whether their projects qualify for R&D tax relief or not.
Ultimately, if we can’t get a client comfortable claiming for a project – even if experience tells us that the activities would almost certainly pass the tests – then the claim doesn’t go in. Simple as that. It’s not our claim, it’s theirs, and it’s their neck on the line if HMRC come knocking. We’d rather have a better relationship with our clients built on honesty and trust than try to make them a quick buck on something they don’t believe in.
Andrew Hubbard, editor-in-chief of Taxation Magazine, asks in the latest issue (2 July 2020) whether there should be an accreditation of advisors. In an ideal world it needn’t come to that but, sadly, we’ve seen so many cases where a company has had such a bad experience with their R&D advisor that it feels like the time might be right for regulation.
Countless cases of bad service from R&D advisors don’t make it to Tribunal – the claim’s either completely retracted on enquiry, mired in endless back-and-forth that gets nowhere, or the R&D advisor simply vanishes and moves on to the next client, leaving the company to pick up the pieces and try to repair its reputation with HMRC.