Risk in R&D tax relief claims

Established financial services businesses know that they must become increasingly agile to compete with fintech ?disrupter? businesses - innovation has never been more important to their business models. Happily, UK research and development (R&D) tax reliefs offer highly valuable support to all businesses seeking to innovate although claiming the reliefs is not always as straightforward as it may seem.

Targeted reliefs

The government has recently consulted on ways to enhance R&D tax reliefs for the future. One thing that will not change however is that they are targeted reliefs; not all projects will qualify, and not all costs for qualifying projects can be claimed. HMRC is bolstering this targeted approach by recruiting 100 new inspectors to scrutinise R&D claims, so there will be a higher chance of R&D claims being investigated in the future. This of course doesn't matter if your claim is accurate and clearly explained. However, even after 25 years in the financial services industry (ten of those as an R&D specialist) it still surprises me that so many businesses of all shapes and sizes submit R&D claims that are not up to scratch.

Why claims are investigated

It is common sense that if you don't understand something you are more likely to be suspicious of it, and this holds true for R&D tax inspectors. While there are highly skilled teams at HMRC's R&D tax relief units, they are not clairvoyants and not necessarily software experts. Supporting your claim with suitable details (e.g. a step by step narrative explaining the project and the technological innovation it is intended to lead to) can therefore drastically reduce the risk of a claim being challenged. If your R&D claims are prepared by your finance team, incorporating such information may be a challenge in itself.

Similarly, insufficient detail and explanation of the project costs you are claiming and 'suspiciously unsubstantiated? (rounded) costs are bound to draw a tax inspector's eye. HMRC officers can recognise where claims are out of kilter with similar projects and will query unusually high costs. That is one reason why BDO has developed an AI-based benchmarking tool for R&D claims, so that our clients can check whether they will be perceived as over-claiming by HMRC or if they are potentially under-claiming. 

Don't be a test case

HMRC frequently uses test cases to send a message to taxpayers in a particular sector and or on a particular tax issue. R&D claims are no different and we understand that there may well be an increase in activity in this area as HMRC ramps up its R&D team.

I have been called in to help enough businesses struggling to handle post submission enquiries to know that it is an expensive way for them to learn about the R&D claim process, and not a cost-effective way for any financial services business to operate. It is far more efficient to get an external expert in from the start to make sure that relevant data is captured as you go along, and to make sure that your claim is forensically reviewed before submission, to ensure that the potential for challenge by HMRC is all but eliminated. Reducing this risk means no wasted effort for your business, more certainty over the amount of relief available, and usually a quicker tax rebate.