Is HMRC the appropriate arbiter for qualifying R&D activity?
One of the key tenets of the UK’s Research and Development (R&D) tax credit scheme is that the claimant company must undertake R&D activity that seeks to advance the existing knowledge or capabilities in the field.
The company needs to do this by resolving a technical or scientific uncertainty. This uncertainty is measured against the knowledge or capability of the competent professional working in the field. The idea being that if someone who knows what they are doing in relation to that specific field of science and/or technology is not able to provide a solution to the problem, then it is likely to be a qualifying R&D activity.
As a principle and a theory, this approach does have its merits, therefore, companies have been educated and guided by advisers to use this as a measure when working out whether they are carrying out R&D that qualifies for the UK tax credit.
Do caseworkers lack technical knowledge?
In recent years, HMRC have opened an increasing number of enquiries into R&D tax credit claims made by UK companies. The onus in those enquiries is on the claimant company to convince the HMRC caseworker that the company has carried out qualifying R&D activity. However, the caseworker is unlikely to have a background in the technology or science that is the subject of the R&D activity.
When an enquiry is opened, the claimant company has no idea about the level of competence of the caseworker in the technological or scientific advance that is the subject of the R&D claim. This makes it difficult to know how to communicate. Should the company’s specialists attempt to simplify their explanations and, in doing so, risk making their work sound so easy that they cannot demonstrate that they were carrying out qualifying R&D? Or should they communicate in technical language but then risk the caseworker not appreciating the real difficulty of the advance being tackled?
While the company must meet a standard to be competent professionals, there is no such requirement on HMRC to provide caseworkers that meet the same standard. This creates a mismatch that can be difficult to overcome.
There is a risk that the enquiry process becomes less about whether the claimant company has carried out qualifying R&D activity and more about the ability of the claimant company to be able to communicate effectively with the HMRC caseworker.
Levelling out the playing field
The playing field could be more level if the arbiter of whether a company was carrying out qualifying R&D were not HMRC but an independent third-party technology or science organisation. The independent body, say a university, could be pre-approved by HMRC as having the credentials to be competent professionals.
If HMRC then raises an enquiry into whether the claimant company’s R&D activity meets the qualifying conditions, those questions can be resolved between the claimant company and the independent third party.
This could also be linked to the prospective advance approval process. In that case, the claimant company could approach the independent body for a certificate to confirm that it is carrying out qualifying R&D activity. This certificate could then be added to the claim when submitted to HMRC so that HMRC knows this has been concluded.
HMRC’s role would then be to be satisfied that other (tax-focused aspects of the claim) have been met.
HMRC to establish an R&D expert advisory panel
HMRC does seem to have recognised this and is creating an R&D expert advisory panel. The aims are to give HMRC insight into cutting-edge R&D and enhance HMRC’s understanding of innovation and developments across various sectors; to provide HMRC sectoral insights and challenge HMRC’s own guidance and communications.
However, the panel will comprise six members, devoting 40 hours per year. It is unclear how this will be an effective solution to upskill all the caseworkers to an appropriate level of technological and scientific competence to adequately engage with technical leads at claimant companies, many of whom will have decades of experience in their specialist fields.
Engaging with an independent third party may result in costs for the claimant company. Consideration should be given regarding the costs to ensure they are set at an acceptable level for all parties and whether they can be treated as costs that qualify for R&D tax credits.
This would be a shift in approach but is worthy of consideration, especially if it improves the environment for R&D tax credit claims, while also helping to satisfy one of HMRC’s objectives, i.e., to reduce error or fraud.
For more information or support with an R&D claim or enquiry, please contact Stuart Weekes, or your usual Crowe contact.
