harrisandclarke

What accountants need to know from the AHK Recruitment R&D tax tribunal case

HMRC recently reported on the outcome of a first-tier tax tribunal case investigation into an R&D tax claim.

What happened during the investigation

In this case, AHK Recruitment Limited worked with Optimal Compliance to compile an R&D claim for an internal software project. HMRC opened an enquiry to understand how the project qualified as R&D in line with the legislation. After months and months of delays following HMRC requests for evidence Optimal, on behalf of AHK, could not produce sufficient evidence around the projects and critically could not produce a competent professional at AHK to provide evidence. Whilst CVs were submitted, HMRC could not speak to them directly. The HMRC enquiry also highlighted that whilst subcontractors costs formed part of the claim there was no evidence of what they were doing and how it aligned to any potential R&D project.

What can we learn from this case?

1. HMRC are reasonable with R&D enquiries
   • HMRC gave the company extra time and guidance to help them evidence what their R&D was.
   • If you give HMRC the run around it will put you in a difficult position. It is essential to engage with HMRC when asked –  companies or advisors should build a line of communication with HMRC that is both timely and accurate.
2. Don’t underestimate the role of a competent professional
   As much as an accountant or R&D advisor should drive out the eligible R&D expenditure with their clients, the company should always be in a position to present the competent professionals to HMRC. This is one reason why GovGrant spends time with our clients (ideally meeting face to face). When we make a claim we always consider how any competent professional will respond to HMRC in the event of an enquiry. It is increasingly common for accountants to be involved with R&D claims, what this case underlines is that it is not just about the numbers and that the technical assessments need real thought and challenge.
3. The baseline is essential to establish the validity of a claim
   This means evidencing what solutions were available, why they didn’t work and showing that enough work had been done to explore a solution before embarking on a project. To demonstrate R&D has taken place there needs to be an advance in the field which raises the overall knowledge above baseline. Advisors should take this point as a must – it also aligns to the current thinking in the HMRC tax credit consultation with calls for evidence of IP management at the start and throughout the R&D process.
4. Evidence in any R&D claim should be a legal requirement
   There is no actual requirement for technical evidence to be submitted with an R&D claim and it may only be required in an enquiry situation. This leaves the door open to poor practice and accountants need to be comfortable that where their client is using a third party R&D advisor, their client has chosen an appropriate partner with the right level of expertise.
5. Third-party costs need to be documented
   The costs associated with any claim, particularly from third parties, need to have solid and accurate documentation which details the specifics of what was done or delivered.

What it means for R&D advisors

The R&D market is a competitive one with new players on an almost daily basis. As most advisors charge on a contingent basis, sadly there are some poor behaviours that make this market feel more PPI than professional services. This case underlines the reality – R&D is complex and needs due skill and attention from a professional. We at GovGrant believe in the specialist nature of R&D work – in the methodology of a claim, the compliance to legislation and the technical evidence needed.

This judgement should not scare clients who are making an R&D claim or deter accountants from raising the potential, quite the opposite. This is a vital source of government investment in innovation – but it needs to be treated as such – an investment, not free cash for anyone who asks.

There should be no room in this industry for cowboys and poor practice as agents have a role to play in protecting the integrity of the scheme and that the government investment is well place. Providers who offer headline solutions of compiling R&D claims in ‘minutes, not hours’ need serious scrutiny. Can you get enough evidence in minutes and will those providers be there to support you in an HMRC enquiry? Most certainly not.

There is obviously a need in some cases to streamline processes and make the process reflective of the benefit that is received – but not at the price of potential abuse. DIY software platforms have a role to play but accountants and advisors should be under no illusion that it replaces in depth consultancy when it is needed.

We wrote to you last week to help you prepare to make a claim through the Coronavirus Job Retention Scheme. We are now writing to tell you how and when to access the system with some more information about what you will need to have ready before the system goes live.

We are also updating you on an important change to the scheme relating to employee eligibility:

• you can claim for employees that were employed as of 19 March 2020 and were on your PAYE payroll on or before that date; this means that you will have made an RTI submission notifying us of payment of that employee on or before 19 March 2020
• employees that were employed as of 28 February 2020 and on payroll (i.e. notified to us on an RTI submission on or before 28 February) and were made redundant or stopped working for you after that, and prior to 19 March 2020, can also qualify for the scheme if you re-employ them and put them on furlough.

More information on this can be found on GOV.UK.

How to claim

As you prepare to make a claim, please note:

• the online claim service will be launched on GOV.UK on 20?? April 2020 – please do not try to access it before this date as it won’t be available
• the only way to make a claim is online – the service should be simple to use and any support you need available on GOV.UK; this will include help with calculating the amount you can claim
• you can make the claim yourself even if you usually use an agent
• claims will be paid within 6 working days; you should not contact us unless it is absolutely necessary – any queries should be directed to your agent, representative or our webchat service
• we cannot answer any queries from employees – they will need to raise these with you, as their employer, directly.

Information you will need before you make a claim

In addition to the information in our previous email, you will need to have the following before 20?? April 2020:

• a Government Gateway (GG) ID and password – if you don’t already have a GG account, you can apply for one online, or by going to GOV.UK and searching for ‘HMRC services: sign in or register’
• be enrolled for PAYE online – if you aren’t registered yet, you can do so now, or by going to GOV.UK and searching for ‘PAYE Online for employers’
• the following information for each furloughed employee you will be claiming for:

1. Name.
2. National Insurance number.
3. Claim period and claim amount.
4. PAYE/employee number (optional).

• if you have fewer than 100 furloughed staff – you will need to input information directly into the system for each employee
• if you have 100 or more furloughed staff – you will need to upload a file with information for each employee; we will accept the following file types: .xls .xlsx .csv .ods.

If you want an agent to act for you

Please note:

• agents authorised to act for you on PAYE matters can make the claim on your behalf using their ID and password
• you will need to tell your agent which UK bank account you want the grant to be paid into, in order to ensure funds are paid as quickly as possible to you.

You should retain all records and calculations in respect of your claims.

Guidance on GOV.UK is being regularly updated so please review it frequently.

We continue to wish you all the best at this challenging time.

Yours sincerely

Jim Harra

First Permanent Secretary and Chief Executive – HMRC