Three simple steps to understanding clients’ R&D tax claim eligibility
Accounting firms are increasingly realising the potential of providing R&D tax claim services for clients. Not only does this offer an additional revenue stream, but it is a service that clients actively seek from someone they consider to be a ‘trusted advisor’– especially at a time when margins for compliance services are eroding, states Mike Dean, Managing Director, WhisperClaims
However, some firms remain cautious of the thought of going down this route. This is understandable due to the rumoured headaches of the claims process, and with HMRC clamping down on risky and potential fraudulent claims. However, whether you’re an accountancy firm or a specialist consultancy, understanding your clients’ eligibility is an easy, seamless process – as long as you break it down into three simple steps.
HMRC’s Key Criteria
Firstly, before firms can begin to review their client (and/or prospect) base for any R&D tax claimants, it is crucial to understand the key criteria HMRC outlines:
1. The work is in an area of science or technology
This is the most fundamental criteria for eligibility—the work you’re claiming on must be within an area of science or technology. If you can’t relate your client’s work to one or more areas of science or technology, it is not qualifiable. It is also vital to note that research carried out in an area of social science isn’t eligible.
2. The work is structured as a project
A “number of activities conducted to a method or plans in order to achieve an advance in science or technology” is what HMRC defines as an R&D project. They also state that a project “may be part of a larger commercial project”. So, what does this mean for your client and their tax claim? It is essential that they have planned their work and set out to accomplish an advance, rather than simply stumbling upon it while doing their day-to-day tasks.
3. Science or technology will be advanced through the work
- What is an advance in science or technology? As simple as it sounds, the outcome of the project represents an increase in overall knowledge in a scientific or technological area. However, R&D tax relief can be applied more complexly to company work. HMRC outlines four possible areas in which a company could make an advance, and therefore, be eligible for R&D tax relief:
- Work that seeks to extend overall knowledge in a field of science or technology;
- Work that seeks to create a process, material, device, product or service which incorporates an increase in overall knowledge or capability in a field of science or technology;
- Work that seeks to make an improvement to an existing process through scientific or technological change;
- Work that seeks to duplicate an existing material, device, product or service in an improved way using science or technology.
4. Technological uncertainty was encountered during the project
By definition, a project has technological uncertainty if your client was unsure at the outset whether it was technically possible to achieve the desired end goal. This usually involves an acute level of both commercial and financial risk, and experienced staff members scratching their heads.
5. The company used competent professionals in the area of science or technology to carry out the work
The reason is simple: HMRC wants to ensure that the project was challenging for people with science and technology qualifications and experience.
After understanding these key criterias, then the first step in establishing a claims review service is to undertake an eligibility review.
Step 1: Reviewing the client base
There are three key areas of companies that a firm needs to consider – and each involve quite clear ways of identifying eligibility:
Clients and prospects already claiming R&D tax relief;
Clients and prospects that have claimed in the past, but are not currently claiming;
Clients and prospects that haven’t claimed before.
Clients that are currently claiming are simply those that have made a claim in a recent financial year, and whose claims are still being processed. This is by far the easiest category to review for eligibility. The main concerns to think about here are:
Who prepared their most recent claim? Your company, or a third-party?
If the claim was prepared by a third-party, are you happy with the eligibility of the claim?
Was the recent work claimed for ongoing, or a one-off?
For companies who have claimed in the past, but are not currently claiming, it is important to understand why. There are instances when companies know they are not carrying out eligible R&D; or on the other hand, there may be instances where they feel their previous claims were not justified (note: automated R&D tax claims software can help here). It may be that there have been structural changes in the company or management and making a claim for R&D tax relief has fallen down the priority list. However, it can also be simply the case that a company had an off-putting experience with a third-party provider during their last claim.
Once you’ve identified which of your clients fall into this group, it is a fairly painless process to assess whether they’re likely to be eligible. Due to the fact that they have previously claimed for work, these companies will also have a good understanding of the types of work they are entitled to claim for, and so, should be able to find out if they have performed any of that type of work in the past.
The last category to consider covers clients that haven’t claimed for R&D tax relief before, along with prospective clients for whom you don’t hold information about their R&D claim history. Assessing these clients for eligibility isn’t always easy, but there are ways to use information you already hold to make it a lot smoother. The goal of this analysis is to enable you to focus your efforts on the clients most likely to be able to make a claim for R&D tax relief.
To accomplish this first analysis, SIC (standard industrial classification) codes can be segmented (how likely is a company in that sector to conduct eligible research and development?); identifying indicators of R&D in annual accounts, such as grants received, high subcontractor costs, an increase in raw material spending, and patent application costs.
Step 2: Obvious VS less obvious cases
The obvious R&D cases usually meet most, if not all, of HMRC's eligibility criteria, such as; operating in the technical sector, employing technical personnel, having R&D costs in their accounts, making successful R&D claims in the past, or being a technical start-up.
Third party R&D consultancies have regularly targeted companies with high R&D costs and obvious eligibility, which could result in R&D sales fatigue. By emphasising how your role as a trusted advisor can provide them with a more tailored and appropriate service than third parties, whether through your fee structure or the manner in which you prepare their claim, you're on the right track.
A less obvious R&D case will usually tick one or two of the boxes described above, but it may be hard to make a final decision about their eligibility without talking to the company’s management team. It is also vital to manage the client’s expectations—you don’t want to find yourself leading a company to believe that they’ll be able to claim R&D tax relief before establishing its eligibility on the claims.
However, your position as the company’s accountant can be incredibly valuable. By being a regular contact with the client, you will be able to ask questions about R&D without having to sell services upfront.
Step 3: A Claim’s Risk
In terms of R&D tax relief claims, the eligibility of a claim and the risk of the claim being investigated by HMRC are not directly related. A claim's risk of being investigated by HMRC has more to do with other factors than its eligibility, which is why it is important to consider the risk of submitting a claim in conjunction with assessing its overall eligibility.
However, if you’re not convinced about the eligibility of a claim, you should never submit the claim to HMRC, regardless of how low you feel the risk is, to avoid any hurdles with them in the future.
Risk assessments are designed to mitigate the risks inherent in eligible claims, and to prepare yourself and your client for HMRC's response in high-risk cases.
HMRC typically investigates claims based on factors such as: company sector; claim size and turnover ratio; company age; grants; complications from company structure; and technical narratives within the project details.
Again, having access to dedicated R&D tax claims software that includes a risk assessment, can be helpful in supporting you and your clients in this final step. If the software comes with an expert R&D tax claim support team, they can steer you in the right direction and give you confidence that your claim is robust before it is submitted to HMRC.
Understanding R&D tax claims eligibility and providing clients with a trusted R&D tax service is readily achievable and doesn’t need to be a complex or costly undertaking. The fact that companies of all sizes actively seek the assistance of accountants in fulfilling this role means that it is a revenue stream and a value-added service you cannot ignore, and with the right support isn't as challenging as you might think.