One of the key aims of the proposed changes to the R&D tax legislation is to tackle abuse and compliance. One of the solutions will be for businesses to provide additional information to substantiate a R&D tax claim. This is getting lots of attention at the moment, with the recent Times’ and Sunday Times’ investigation into R&D tax claims, which highlights the abuse taking place facilitated by some “aggressive” advisors who are encouraging businesses to make questionable claims. A number of businesses have been highlighted in these recent articles in respect of potentially spurious R&D tax claims.
With this additional scrutiny, it is important to have a reputable R&D tax adviser assisting with your claim to ensure that both R&D assessments and supporting documentation are complete and robust to minimise the risk and cost of any queries into the R&D tax claim.
While R&D tax claims are based on self-assessment, the legislation is complex and difficult to interpret. In my experience, this is especially true in the science, technology and engineering sectors. This is made even more difficult where professionals employed by the claimant company, deemed to be the competent professionals for the purpose of the legislation, may not have been involved with a R&D tax claim previously. The process of robustly identifying both eligible and ineligible activities can be challenging, and it is extremely important for businesses to have a trusted R&D tax adviser who possesses the appropriate experience and knowledge of the science or technology sectors.
The advantages of using R&D tax advisers with industry specialisms
The clear advantages of using R&D tax advisers with industry and technical specialisms include that they speak ‘the same language’ as your engineers and technologists (competent professionals) and can better assist them with the correct identification of R&D activities. For example, helping to correctly identify the R&D boundaries and ensure the R&D assessment is correct, which in turn helps the claimant company manage its risk with HMRC and maximise the claim to which it is entitled.
Advisers with the relevant technical knowledge and experience are also typically able to draft robust claim documentation, specifically the technical narratives. These are included in the R&D tax claim report and describe examples of the eligible (and ineligible) activities at the appropriate level of detail and so can better justify why these activities meet the R&D tax definition.
How does industry expertise help with R&D claims?
1. Technically experienced R&D tax advisers can demonstrate their credentials with the client’s engineers and technologists and assist them with the identification of their R&D activities. Without the appropriate advice, many engineers may find it challenging to correctly apply the R&D tax rules to the activities on their project. For example, in my experience, many software developers may feel that the work they have undertaken during a project is routine development work and any challenges faced will not necessarily qualify. This often is not the case.
For example, you may have a software team who have implemented Kubernetes to scale containerised applications within a cloud environment. Someone without the appropriate knowledge and experience of containers and Kubernetes may not know which follow-up questions to ask to correctly identify eligible R&D activities. Individuals with the appropriate technical knowledge and experience of containers, however, may ask follow-up questions around security challenges, specifically around how to detect vulnerabilities, or around issues with deploying Kubernetes across multiple cloud providers such as Azure and AWS, or around interoperability and container orchestration between cloud-native applications. These follow-up questions will help the technologist to understand that the provisioning, commissioning or deployment of a Kubernetes implementation involved areas of technological uncertainty, which meet the criteria for R&D, thereby maximising the claim for the client.
The above example also helps the technologist to identify which technical activities fall outside of the relevant R&D definitions and therefore do not represent a technological advance. This ensures that the R&D eligibility assessment made by the engineers or technologists is robust and can be substantiated. Due to the focus on tackling abuse and the recent Times’ investigation, it is even more imperative to ensure the claim is robust and able to stand up to scrutiny.
2. The other key advantage of possessing technical specialists within your R&D tax team is when it comes to drafting the technical documentation to substantiate the technical activities included in the claim. Most enquiries into R&D tax claims that I have seen over the years are focus on this. In some cases, either the R&D tax inspector or the Chief Digital and Information Office (“CDIO”) team do not understand the advance that has been described or why the work constitutes an advance in the relevant field of science or technology. In some cases, the documentation does not appropriately explain why the technological uncertainties were challenging and how they differ from a more routine solution that is deemed to be baseline knowledge within that field. The business would need to explain why the performance challenge fell outside the industry baseline and why the solution being implemented was not a typical or known fix.
In my experience, individuals who have experience or knowledge of resolving such technical issues in their previous roles can understand and explain the ‘why’ around the technological advancements and challenges. These individuals are able to produce robust documentation which stands up to HMRC/CDIO review. On occasion, even individuals with an IT background can struggle to appropriately position the various advancements and uncertainties within a technical narrative.
This further demonstrates the importance for R&D tax advisers to possess individuals in their team with the relevant technical knowledge. The clear advantage being that they are able to sufficiently and clearly set out the various scientific or technological advancements and uncertainties to minimise the risk of HMRC follow up questions or enquiries.
Working on R&D claims without industry experience
It is not impossible for individuals without industry experience or those who may be less technical to succeed as R&D tax advisers. They are likely, however, to have to spend significant amounts of time researching and learning about the various technologies. When I started my first R&D tax role at KPMG in 2010, I was told by the Director that we were going to see a video game company in my first week. Having come from a healthtech background, the types of technical development activities a video game company would be undertaking would be very different to those in healthtech. I spent three days preparing for the meeting by researching games engines (used to develop games), the Python scripting language used at the time for a lot of video game development, refamiliarising myself with C++ and potential issues with existing games engines. I was therefore able to work with the technologists to assist them identify the actual technological uncertainties as opposed to activities which may not meet the definition of R&D. The advantage for me was that I possessed the baseline understanding of how software applications and systems work, which gave me a head-start when it came to my research.
Check your R&D advisers’ credentials
In recent times, I have spoken to many businesses that have engaged with R&D tax advisers who market themselves as ‘industry experienced technical specialists’. Some of these claims have to be looked at carefully. Some advisers may badge themselves as industry specialists because they have worked on one or two software claims or completed a software module during their university degree. Businesses should verify their advisers’ credentials at the outset as this could be the differentiator between maximising the R&D claim - or not, and managing risk with HMRC – or not. This becomes especially relevant in light of the recently proposed changes to the R&D regime.
Although R&D tax teams usually reside within the wider tax function of most professional services businesses, the real value-add for their clients is the technical aspect. The R&D tax function should therefore be a technology-led proposition, supported by tax specialists, which will result in the optimum experience and best results for clients.
The R&D team at Evelyn Partners
Here at Evelyn Partners, we have a team comprised of industry-experienced specialists who have spent time working in industry and also have significant experience assisting businesses prepare R&D claims. These individuals work alongside tax specialists who support the R&D claim process. Feedback from our clients who have benefited from this approach has been extremely positive; the engineers and technologists have appreciated our in-depth assistance with eligibility assessments and defining R&D boundaries to maximise the claim value while minimising risk of HMRC enquiry.
If you require assistance with your R&D tax claims, please do not hesitate to get in touch.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.