The growing challenges confronting R&D Tax Advisers

R&D Tax Reliefs and associated schemes like Patent Box are a complex area of tax, requiring advisers to be highly skilled, technically minded, and well versed in all the latest regulations and eligibility conditions.

The need for this dedicated expertise is growing yearly as HMRC continues to crack down on issues relating to errors and suspected fraud by companies claiming relief through the R&D scheme.

This means the job of the R&D tax adviser is getting more challenging, with greater scrutiny and more penalties being issued by HMRC. 

It has never been more critical for businesses to ensure they work with R&D advisers who conduct R&D claims correctly or for the advisers to seek the best advice available to help them de-risk their client cases.

In this article, we will look at the most significant challenges faced by R&D Tax Relief advisers in the UK.

Increasing complexity in R&D tax legislation

The UK’s R&D tax relief schemes are continually evolving to maintain pace with Government strategy and policy, more recently targeted at tackling fraud and error. As a result, the tax rules relating to R&D are both highly intricate and subject to change, which has been significant in 2023, with further changes proposed in 2024.

A continuous challenge for R&D tax advisers is keeping up with these changes and fully understanding their implications for clients doing R&D.

Intricate and evolving eligibility criteria

The eligibility criteria for R&D tax reliefs often include more areas than businesses may think; however, determining whether a specific project or R&D activity meets the HMRC definition of R&D, rather than the business definition, can be complicated.

Eligibility can involve an element of subjectivity and must be underpinned by extensive documentation and evidence. It, therefore, requires a deep understanding of the BEIS guidelines that underpin the legislation to measure this against R&D projects, enabling you to complete a valid claim with necessary documentation before submission.

Documentation

Documentation plays a considerable role in a successful R&D tax relief claim, and it is an area where poor records are likely to see a claim fall down. R&D activities must be appropriately documented and substantiated to claim tax relief.

In 2023, HMRC introduced the mandatory requirement of an ‘Additional Information’ form, which asks for information on the R&D projects and costs, information about the company’s identity and tax reference numbers, and a Senior Officer’s sign-off of the R&D claim. Their details must be entered on the form, as well as the details of any Agent used to help prepare the R&D claim.

There are set criteria about the number of projects you must report on in full detail for the form, covering at least 50% of the R&D expenditure being claimed.

Enquiries and disputes

In the last couple of years, HMRC has increased staff to over 500 for R&D compliance and invested in new technologies to identify and investigate cases of error-strewn or potentially fraudulent claims.

The overall level of error and fraud across both R&D Tax Relief schemes in 2020/21 was 16.7% (amounting to £1.13 billion), up from the previous level of 3.6%.

In simple terms, HMRC is putting much more time and resources into assessing R&D claims, using a volumetric and targeted approach to launch an expediential increase in enquiries and issuing penalties. This has been highly publicised, and many in the profession consider HMRC’s approach too aggressive.

R&D tax advisers must be sufficiently resourced and knowledgeable about defending their clients' claims and navigating any disputes they may face.

Additional challenges facing R&D tax advisers

The above challenges are causing significant difficulties for many companies claiming R&D tax relief; HMRC has reported that nearly half of all claims they have received since 8 August 2023 were invalid because the additional information form had not been submitted.

There are, however, several additional areas that must also be considered by practitioners wanting to do R&D Tax Reliefs properly.

Client education

There is a chance that the client of an R&D tax adviser has little to no knowledge of how the R&D tax relief schemes work, the requirements, or how these change over time. As an R&D tax adviser, clients must be sufficiently educated on these matters.

Data collection and security

Producing an eligible R&D Tax Relief claim involves gathering a large amount of data on the business and its R&D expenses and ensuring it is secure. This can be particularly challenging for smaller SMEs or large organisations with complex operations.

Globalisation

If an R&D tax adviser works with a client with international operations, things can get considerably more complex as they must navigate multiple countries' varying R&D tax credit programs and rules on capitalised R&D.

Technological resources

The definition of R&D for tax purposes changes over time, with new activities added as they become more ubiquitous in the economy. A recent example is the inclusion of pure mathematics as a qualifying activity and data licensing and cloud computing costs as eligible expenditures from April 2023. An R&D adviser must keep up with such changes to ensure they don’t miss client opportunities.