QUESTION: I own two newsagent and confectionery shops and trade through a limited company. I am constantly getting unsolicited phone calls and emails from people purporting to be ‘R&D experts’ who are telling me that I am missing out on thousands of pounds of tax relief. I am sceptical as I just run a couple of shops. What is this relief and could my company qualify for it?
ANSWER: You are correct to be sceptical, as it is highly unlikely that a company that sells sweets and newspapers is engaged in any form of research and development activity.
What started out over 20 years ago as a valuable tax relief for companies who are engaged in genuine R&D activities has in too many cases become a ‘wild west’ for rogue advisers selling ‘snake oil’ claims and who invariably won’t be around to help when HMRC finally comes calling.
R&D tax credits is a valuable form of tax relief however to qualify for it, the company needs to explain how a project:
• Looked for an advance in science and technology;
• Had to overcome uncertainty;
• Tried to overcome this uncertainty;
• Could not be easily worked out by a professional in the field.
If you are able to satisfy these requirements, then the company may be entitled to claim an extra 130 per cent of the qualifying expenditure as a deduction from profits under the SME R&D scheme.
With the UK corporation tax rate at 19 per cent this is effectively a cash benefit of £247 for every £1,000 spent on qualifying R&D activities.
Such a generous tax relief unfortunately has proven to be wide open to abuse from unscrupulous R&D ‘boutiques’ who typically operate outside of the mainstream accountancy and tax professional service providers and who all too often have no professional body to be held accountable to or even worse, no professional indemnity insurance.
HMRC estimates that it is losing £150m a year in bogus R&D claims. Simply google ‘R&D tax credits’ and you will be bombarded with a plethora of ‘boutique’ firms.
However, from April 2023 it is intended that a newly staffed HMRC anti avoidance unit will make it very difficult for bogus claims to succeed. The main tools and measures to be implemented by HMRC will include:
• All claims must be made digitally thus enabling HMRC to check the validity of a much higher proportion. For example, your business activity (sale of confectionery) will have a Companies House SIC code and HMRC will have a red list of SIC codes which should not generally be claiming R&D tax credits;
• Claims will have to supply detailed costs and explain how the activities qualify for the tax relief;
• A senior company officer will have to sign the claim off and therefore take personal responsibility for it;
• Claims will have to include details of the agent submitting the claim. This is a major development because all too often the claim is prepared by a rogue advisor who hands it to the poor old tax agent (typically the long standing family accountant) to submit. This finally brings accountability to the rogue advisor;
• Finally, it is likely that the company will have to give HMRC advance notice that it will be making a claim.
This is just short of bringing R&D claims into the Disclosure of Tax Avoidance Scheme (Dotas) regime whereby HMRC are forewarned of taxpayers participating in something that reduces their tax liability.
You should therefore resist the temptation to engage one of these boutique ‘specialists’ and instead have a chat with your business accountant and see what their view is on the likelihood of your company qualifying for this tax relief.
Remember, a bogus claim which is overturned will result in the repayment of the tax along with interest and a penalty.
:: Paddy Harty (p.harty@pkffpm.com) is a senior tax director at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
