When it comes to the claiming of research and development reliefs, too many advisers are bending the rules to breaking point, says Andrew Hubbard.
Over the past few months I’ve spent a lot of time looking at the current state of the operation of the market for advice on research and development reliefs. I have to say that some of the things I have seen have caused me significant concern.
Before I explain this, however, I do want to stress that much of the market is working well. Day in and day out firms, large and small, are giving clients valuable and constructive advice on what reliefs can be claimed and then helping them to quantify and submit claims. R+D reliefs are valuable. The rules are not always clear, not all businesses are aware of what expenditure qualifies, and advisers are doing a valuable job in ensuring that businesses receive the support that they are entitled to. High quality work is being done both within traditional accounting firms and specialist boutique ones.
But there is another side to this. I’m hearing about too many cases where the basis for claims is dubious, to say the least, or where the approach that the adviser has taken to managing the claim doesn’t accord with accepted professional standards.
So first, what about the claims? Almost everybody I spoke to had stories of seeing cases where claims had been made on what seems to be the flimsiest of grounds. We all know that there can be a wide measure of acceptable interpretations of any set of rules, but when claims are submitted for developing new pizza toppings then something is wrong. If this were a one-off then it could be dismissed as an aberration, but there is no doubt that some highly dubious claims are being made and many of them have been successful, at least in terms of not having been challenged.
But it is not just the nature of the research which is a problem. I’m aware of cases where it is likely that a small amount of R+D is probably being carried on, but where the claim is out of all proportion to the qualifying activity, with the costs of staff who have nothing to do with the project being lumped into boost the claim. Is the general office receptionist really involved in R+D?
What worries me more, however, is the way that certain players in the market are operating. It seems to be standard practice for some advisers not to allow the client to see the R+D claim before it has been submitted to HMRC: indeed, in some cases clients have never seen ‘their’ claim. If a company does not know what it has claimed for how can it possibly say whether or not it has met the qualifying conditions? When I first heard about this practice I thought that somebody had misunderstood what has happening, but I’ve heard about it too often now, from different sources, and I have no doubt that this is indeed the way that some firms are operating. I assume that the rationale is that if the client sees the claim before it goes in to HMRC the adviser might lose control of the process and not get paid.
That brings me to the heart of the issue. There is an alarming lack of transparency in the way that some people in the marketplace are operating. I hear stories of firms appointing themselves as R+D agents in order to get the refund paid directly to themselves, of firms structuring R+D claims to give themselves the highest possible fee rather than producing the best overall result for the client; of refusal to co-operate with the company’s tax advisers when it comes to dealing with HMRC enquiries and indeed of leaving the company high and dry when it comes to providing information to HMRC. I could go on, but I hope that I have shown that there are issues here which need to be resolved – there is much unhappiness among reputable advisers about the way in which some firms appear to be undermining the integrity of the R+D reliefs.
Where do we go from here? One view which I heard repeatedly was that HMRC was not doing enough to monitor R+D claims and was letting far too many spurious ones through. There is a strong feeling that HMRC has been encouraged by the government to take a ‘softly-softly’ approach because of a desire to show that R+D tax credits have been a success in supporting the innovation agenda. I have no means of knowing whether this is true or not, but the fact that that perception is out there is worrying.
Is regulation the answer? Some people I spoke to were very keen to explore whether the making of R+D claims could be restricted in some way to those who had demonstrated sufficient expertise in the area. Devising and implementing any regulations would be very difficult of course and I don’t think that this can be the way forward. Does the answer lie within the profession itself? Could it do more to encourage professional standards? It is notable that the professional bodies have recently issued a supplement to Professional Conduct in Relation to Taxation dealing specifically with R+D claims: they clearly recognise that there is a problem here.
Advisers will always disagree on the interpretation of rules and there will always be cases where one person believes that relief is due and another doesn’t. That is part-and-parcel of our professional lives and long may it continue. What I am talking about here is something very different. I’m convinced that the market for R+D advice has taken a wrong turn: all of us have a responsibility for trying to get it back on track.
• Andrew Hubbard is editor in chief of Taxation magazine and has overall responsibility for the technical content of Tolley’s tax publications