Assumption is the mother of all …
The recent case of Hadee Engineering was a long overdue wake up call for R&D tax advisers. In a scenario that many people will find familiar, the company had engaged with a third party R&D consultant to prepare their claim for R&D tax relief, which had been passed to their accountant and submitted to HMRC. The consultant had spoken to the people involved in the business, identified some projects which were more challenging than the company was used to seeing, and allocated some staff time and costs against those projects which formed the basis of the claim.
So far, so good - however HMRC challenged the claim and after quite a long period of uncertainty for the company involved and no doubt stress and expense, the tribunal came down overwhelmingly in favour of HMRC. The judgement that was issued is one of the most comprehensive kickings I’ve seen in tax cases, and it is particularly notable as it is one of the first related to R&D that has made it to tribunal on its merits. Other examples have been where the claim was based on fabricated expenses, whereas this claim was based on real expenses, but with allocations that were not supported by any evidence.
A memorable analogy which HMRC used is that if a bridge builder is asked to build a bridge with the longest span over the highest gorge, he will most likely just use standard techniques, adjusted in relatively obvious ways for the scale of the project. Just because something hasn’t been done in that way before, doesn’t make it difficult or clever.
It has been standard practice for a lot of R&D tax advisers and accountants to prepare claims based on assumed percentages of staff involvement. Often these assumptions will apply to a staff member’s annual salary, which implies that say 20% of that person’s job description relates to R&D qualifying activities. Although that has been the standard practice for many people preparing claims, the tribunal in this case made it abundantly clear that it just isn’t good enough. This should come as no surprise - it isn’t as though you would just claim say 20% of your mileage as being business qualifying. Project by project time apportionments within set date ranges, backed up by evidence, is the standard that should be reached before a claim is submitted. HMRC have been expecting businesses to keep better records for years now, particularly so where a business is asking to draw money out of the tax pool.
We handle a lot of R&D enquiries on behalf of companies, accountants and R&D consultants, generally at the point when it looks like technical issues need to be raised or a serious difference of opinion has arisen in respect of whether or not activities qualify. We have a strong track record there. One thing we can’t help with though is where the figures can’t be substantiated.
Proper record keeping is key - if you don’t already have a system, have a look at quantify.tax which keeps your records, gives you an in-year estimate of your claim value and provides a cloud based collaboration platform for building a claim with your adviser.