Corporate Tax » R&D tax credits: complacency and under-claiming is stifling innovation

With the current Brexit-induced business, economic and political uncertainty, it’s hard to believe that any level of complacency exists within businesses.

But it’s clear that clients have suffered from a distinct lack of robustness, tenacity and dedication within the financial services marketplace – when it comes to  R&D tax credit claims, 70% of UK businesses are significantly under-claiming on an annual basis.

With such a staggering number of businesses missing out on vital funds, questions must be asked of the commitment and approach of their advisors. Especially when the UK government is aiming to raise the rate of UK R&D investment to 2.4% of GDP, up from the current rate of 1.6%, businesses clearly need far more support to gain essential investment.

Missed Opportunities

The innovation cycle is driven by inward investment and the potential value of R&D Tax credits is being realised by more companies each year. But for many, the application process has turned into a formality, with each application just a copy of the previous year’s claim.

Has the R&D tax credit adviser visited the business since the last application? Have they spent time discussing and evaluating business change to ensure key innovations are included in the next submission? Does the adviser actually have Tax Credit expertise and if so, to what level?

While senior resources might be allocated to the initial R&D tax credit application, in the submissions that follow, the role is typically delegated to junior resources that will change frequently.

So, where does this leave a business that is seeking to drive innovation? Massive missed opportunities to claim what they need and are entitled to. Businesses can change dramatically each year,  especially those companies pushing forward with innovation.

Similarly, as technology evolves, so too does the way in which HMRC continues to reinterpret tax credit legislation. Without expertise, confidence and understanding of the nuances of interpretation, too many generic advisers simply leave out any potentially complex areas within a submission.

If the same application with the same information from a claim in 2014 has been repeated every year since, that organisation will have missed out on vast sums of money that could have been reinvested back into the business.

One firm’s claim of £105,000 should have actually been £420,000. This was only realised once the company engaged a firm dedicated to the R&D Tax Credit process and stopped working with its previous competitor auditor. For a company that has an annual turnover of £35m, the business cost of this systematic under-claiming over many years cannot be justified.

Complacency is stifling innovation

That company relied on the trust and reputation of a big name, but it did not pay off. The previous firm did not visit the client for a number of years which resulted in each claim leaving out recent significant areas of innovation and business change – even an entire department was overlooked in multiple claims.

This is a common story amongst businesses of all sizes in the UK. Business trust and long term commitment are being rewarded with a lack of expertise and a complacent attitude that is costing UK business millions of pounds in available and required investment.

Instead, when the R&D tax credit advisory team visits every year, meets with every department to find out the latest updates, even encourages an innovation day where departments interact, the process can actively influence business culture, rather than treating the process like a tick-box exercise.

Combine this approach with a consistent team of tax credit experts that continually work with the client, not just visit them once a year, and regularly assess business change in line with HMRC interpretation, and the entire process is drastically improved.

To fully understand a business’s innovation activity, free flowing conversation and cross-department discussion is required, prompted by experts who understand R&D Tax Credit opportunities and are confident in the minutiae of HMRC expectations.

Dedicated expertise

The process of claiming R&D tax credits is complex, which is why the majority of generic firms take a risk averse approach, minimising claims, aiming low and opting to avoid HMRC questions where possible.

This is also mirrored by smaller accountancy practices that are often engaged by innovative start-ups – by default, these firms will lack dedicated tax credit expertise. When a firm only makes a few claims each year, a lack of confidence or the latest knowledge results in a risk averse culture leading to endemic under-claiming.

Businesses place their trust in their advisers to achieve the best possible claim and management rely on staff  to understand the tax credit process inside out, and continually discuss the latest updates in legislative reinterpretation.

Dedicated R&D firms that have this level of rigorous commitment will be one step ahead when it comes to ensuring each claim is aligned to the latest HMRC thinking. It’s fair to say that no one wants to unnecessarily prompt reams of questions from HMRC.

But instead of a risk averse approach, risk management is required. Providing HMRC with as much information as possible up front, in line with known and understood specific requirements will allow for a rigorous, detailed approach. In essence, they will maximise every possible opportunity for additional investment.

Conclusion

Trust is a key factor of business relationships, yet, for the largest R&D tax consultancies, it has taken a hit in recent years. The Financial Reporting Council has imposed multi million pound fines on companies including BHS and Ted Baker, as well as personal fines to individual senior managers, citing the standard of audit advice.

So far, there have been no examples of firms being reviewed for under-servicing when it comes to R&D Tax Claims, but the widespread under-claiming and apparent lack of senior level commitment cannot be overlooked.

In these uncertain times, innovation is key to business success in the UK so for those companies that think their R&D tax claim is less than it should be, now is the time to ask; why?