Recent HMRC statistics on R&D tax relief have highlighted that an estimated 1% of UK companies are claiming R&D tax relief, and, of those claiming, nearly a third of all claims were for less than £10k. These are surprising statistics. Why is this, and what actions can companies take to make sure they do not miss out on their share of this valuable relief?
The statistics
R&D tax credits have been around in the UK in one form or another for almost 20 years, and over time the uptake has increased significantly.
Although most companies are aware of the tax relief available, statistics released by HMRC in October 2019 show that less than 1% of UK companies are claiming (with less than 50k claims per an estimated 5m companies in the UK).
Obviously not every company in the country will be carrying out eligible R&D activity but (based on our experience), we would expect this number to be significantly higher – between the 5-10% mark.
So, with awareness on the increase, why aren’t more companies claiming?
The same statistics show that nearly a third of all claims were for less than £10k, with 18% of SME claims being for less than £5k. The average SME claim was £54k, so this shows there are a significant number of claims at the lower end of the scale. Again, this is surprising as typically we see tax savings of £30k upwards. Obviously for some smaller companies £5k will be a welcome boost which can make a significant difference to their business – but it does raise a question as to whether companies are maximising claims.
How do you choose the right R&D Provider?
1. Experience
- Many companies with an in-house finance function choose to prepare their R&D claims themselves and this can be an advantage as typically in-house staff will have a good understanding of the R&D work undertaken in the company. However, if the FD is only completing one R&D claim each year, it may mean they don’t have the specialist knowledge to ensure that all the potential projects (and all the eligible costs), are identified and claimed. If a company decides to engage with an adviser, it’s good to know how many claims they typically work on in an average year. An accountant who prepares 2-50 claims a year will not have the practical experience that a specialist provider, submitting hundreds of claims annually, will have and again this may mean the eligible projects or costs are missed.
- It’s also useful to know whether your proposed provider has any experience of making claims in your industry – this can be key to making a maximised claim.
- Does your proposed provider have any direct HMRC experience – this can be invaluable in ensuring only the highest quality claims are submitted.
The Shorts Radius team;
- are specialists who work exclusively on innovation taxes relief.
- has more than 50 years’ experience working on R&D claims.
- boasts an ex-HMRC R&D Inspector, whose detailed knowledge of the operation of the scheme from the other side of the desk is invaluable.
2. Tax and Accounts expertise
Fundamentally R&D credits are a tax relief, and a thorough understanding of how the relief interacts with the company’s corporation tax computation is crucial in ensuring the company maximises the potential benefit.
Depending on the complexity of the company’s tax affairs, the in-house finance resource may be happy to deal with these issues. If you choose to use an external provider, it’s an advantage to ensure they have the appropriate tax and accounts qualifications. Be aware that anyone can call themselves ‘an accountant’ or a ‘tax adviser’.
To be certain you are dealing with a specialist who will also be regulated by a professional body, look out for key qualifications. The gold standard tax qualification in the UK is the Chartered Tax Adviser (CTA); there are several excellent accounting qualifications available but common ones are ACA, ACCA and CIMA. If you do choose to engage an external adviser you need to know they will be able to interact smoothly with your existing accounts team and in-house finance function.
Our Radius team has a mix of CTA and accounts qualified staff and is part of a much bigger independent accountancy firm so we can ensure all the tax and accounts implications are properly addressed.
3. Time
Companies often don’t claim R&D relief due to a lack of resources. Even if a company has staff with the relevant experience, those individuals simply don’t have the time to pull together a claim themselves. This is one of the key reasons why people look to engage a specialist adviser.
Each adviser works in a different way and often companies can be disappointed when, having engaged an adviser, they still find that a lot of the work involved in preparing a claim rests with them.
We would recommend you talk to your proposed adviser about how they work with their clients. For example, since our inception we have set out to design a process which takes as much of the burden from clients as possible. We follow a simple, three stage approach
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Firstly, we aim to have a short meeting or telephone call to establish whether a company qualifies and outline some qualifying projects. We let you know exactly what financial information is needed to support the claim.
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We follow this up with a technical meeting (usually 1 - 2 hours) where we collect the information required to prepare the narrative in support of the claim.
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We prepare the draft report for the client to review, amend and approve, before submitting the claim, or liaising with your accountant to submit the claim to HMRC.
We would balance this by saying that in submitting the tax return, the company is taking responsibility for the R&D claim and so it is equally important that the company is fully aware of what has been included in the claim and why – we do come across instances where a company has never seen what has been submitted to HMRC on it’s behalf, which can’t be appropriate when it’s the company’s representative approving the tax return. We provide all our clients with a copy of the R&D report (it does belong to the client!) and ensure all our clients approve the R&D report prior to submission.
4. HMRC Reputation
Another reason that some companies chose to engage with an adviser is because they believe claims submitted by an R&D specialist will have less chance of being enquired into by HMRC. This may be the case but it’s a good idea to ask your proposed provider about their experience of enquiries.
Many providers will be able to say they have a 100% success rate – but more relevant questions might be what their enquiry rate is – i.e. how many enquiries HMRC raise per 100 claims submitted – or whether/how often they withdraw or amend claims.
In the last five years the Radius group has submitted hundreds of claims without enquiry, have not withdrawn any claims and haven’t amended any claims (unless a client has changed their mind about how to access the relief e.g. cash in losses rather than carry them forward.)
There are other factors that can be relevant when looking at a provider’s relationship with HMRC – for example, do they interact with HMRC by sitting on the R&D Consultative Committee? This HMRC sponsored forum meets bi-annually to discuss the operational delivery of the R&D tax relief schemes and is a vital way to keep up to date with developments and share experiences/feedback to HMRC.
Radius have been a member of the R&D Consultative Committee for more than five years.
5. Enquiries
Enquiries are one of the key reasons why companies are put off from claiming. Past negative experiences of enquiries, even over different taxes, can have a longstanding impact. Whilst it is possible to minimise the chances of an enquiry being raised (by claiming qualifying costs on qualifying projects and providing a report which clearly sets this out) some enquiries are raised at random by HMRC and so receiving an enquiry does not necessarily mean something has gone wrong. However, enquiries can be extremely time consuming. It’s key therefore to ensure that your provider can manage HMRC enquiries efficiently.
Whilst Radius has had no enquiries into claims we have submitted, we do offer a separate enquiry management service for companies, or providers, who have submitted claims directly. This is led by our ex-HMRC Senior Inspector, who has 8 years of raising enquiries into R&D claims and understands in detail how the process works.
6. Terms of Engagement
One final point to consider when choosing an adviser is fee arrangements. Many, if not most, advisers will operate on a % of tax saved fee basis, which gives you the security that you won’t be out of pocket. Be aware that some advisers won’t include dealing with enquiries in their fee agreements – at a time when an enquiry arises, wondering how to pay for the advice you need to manage the enquiry can be an extra pressure. Think about asking for a sliding scale of fees, with the fee percentage reducing as the tax saving increases. We are also aware that some advisers seek to tie in companies to long term (three to five year) contracts – consider how you would deal with the adviser in this situation if the relationship breaks down. Radius does not seek to tie in clients for an extended period – we want our clients to chose to stay with us!
Conclusion
The latest statistics show that more companies than ever are claiming R&D relief – but it’s still widely thought that more could claim, and that claims could be higher. Companies should consider liaising with expert help to ensure they are not missing out. Choosing the right adviser is key to maximising the relief your company claims and the points above highlight some of the issues which can have a bearing on this.
If you feel that R&D may be relevant to your business, please contact one of the team to arrange your free consultation or visit our Resource Library to access more of our guides.
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