Father Christmas or The Ghost of Christmas Past?

17 December 2020 - Elizabeth Nichols

Chris George, Tax Advisory Manager questions whether unexpected notifications of potential tax relief are always what they claim to be.  

No one can deny that this year has been tough.  Every business has faced challenges on a scale not seen in generations.  Income has fallen off a cliff in some cases, expenses have increased as businesses have had to make their workspaces COVID-secure and difficult decisions have had to be made about employee numbers.
So, if you receive a phone call out of the blue stating that your company is entitled to receive large amounts of Research & Development tax relief on expenditure which you have already spent, you might start believing in Father Christmas again.  However, caution must be used when engaging with some ‘specialist’ firms in this area.

Research & Development (R&D) tax relief is a government incentive to encourage companies to innovate and push the boundaries of science and technology.  Keen to make the UK a world leader in R&D, the tax relief has become more generous in recent years and enables some companies to claim a cash repayment from HMRC.  This generosity has led to an explosion in the number of ‘boutique’ R&D advisory firms looking to help companies make an R&D claim.  Let us be clear, I am not looking to tar all specialist R&D firms with the same brush, and there are many such firms which do a thorough and professional job.  But, as in all industries, a small but increasing number of outliers can give the wrong impression of the entire group.

The recent tax case of Hadee Engineering Co Ltd v HMRC clearly demonstrates the risks that can be associated with making R&D claims and highlights the importance of using a reputable, professional adviser.
Firstly, the case concerned an R&D claim made 10 years prior.  This shows how long HMRC can have to look into an R&D claim if a full disclosure is not made, or if they suspect fraudulent conduct.  It is always advisable to file an in-depth, robust report alongside an R&D claim.  This can reduce the window HMRC have to open an enquiry from 20 years to 12 months, providing piece of mind and certainty sooner.

Next there was significant challenge to a number of the R&D projects and the costs qualifying for enhanced relief.  The level of detail provided within a claim and amount of review carried out in determining the qualifying projects and costs need to be significant in order to justify the claim being made.  In this case, a catch-all ‘general R&D project’ was included within the R&D claim, with no further explanation given.  Understandably, this attracted significant criticism from the judge in the case.  We recommend that the people completing the R&D report have detailed discussions with the individuals within the business carrying out the R&D activities and those who are the technical specialists.  It is then important to fully analyse the costs incurred to ensure the claim is maximised without being overinflated.

Finally, when the claim was under enquiry by HMRC, the specialist R&D company who prepared the report declined to assist. This left the client alone to defend the claim made by their advisers at the very time that they were most in need of competent professionals.  It is often the case that some advisers are only too happy to take their percentage of the R&D tax saving achieved, but when there is a bump in the road, they seem to turn into ghosts and disappear into the mist.

At Scrutton Bland, our Tax Advisory team has significant experience in making R&D claims for our clients and also dealing with HMRC enquiries.  We look to work with our clients over the long term, building relationships and fully understanding the businesses we work for so that we can provide comprehensive, tailored advice.  Our aim is to ensure that our clients take full advantage of any and all tax reliefs that are available to them but also to shield them from the risk of a time consuming, stressful and expensive tax enquiry.  Should clients be selected for further checks, we are there to guide them and advise on the best course of action.

So if you think that your company might be eligible for R&D tax relief, contact our team for an objective review of your circumstances and make sure that if someone appears to be Father Christmas, they don’t turn out to be the Ghost of Christmas Past.

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