Over the past several years the R&D Tax Credit scheme has seen unprecedented growth with more companies than ever before leveraging the credit to stimulate cash flow as they look to grow their businesses through the hire of more staff or purchase of new equipment. It has had precisely the effect the Treasury wished it would when the scheme was launched in 2000.
The rise in its use, however, has brought into sharp focus the quality of claim justification: Leyton’s head of tax Guang Deng, who sits on HMRC’s R&D Tax advisory board says: “It’s almost become an unwritten rule that if companies don’t provide some sort of justification or explanation to why they warrant the credits, they will be investigated.”
One Devon-based Finance Director and client of Leyton UK agreed: “Companies completely miss the point that when they claim for the R&D Tax Credit it is requesting a reduction in their corporation tax bills at a cost to the British taxpayer. It’s important to get justification on the record”.
The process itself is monitored by a handful of R&D tax inspectors that work from HMRC’s head office in Whitehall, London. Their expertise, however, sits on the accountancy side of the programme and with claims landing from a multitude of sectors which include software, pharmaceutical and engineering the depth of knowledge required to manage the process is profound.
Highlighting the point, one pharmaceutical company Leyton met submitted a seven-figure claim to HMRC in October 2016 and are still yet to receive the benefit, saying the level of technical jargon used within the supporting documentation was too advanced for a tax inspector to decipher whether the work they were undertaking was actually qualified as a technical advancement. “We have been translating our report for months now,” said the Financial Controller from Cambridgeshire. “The fact that we’ve included this benefit in our accounts has meant we’ve had to answer questions to the board why there is a seven-figure hole in our financial records.”
Deng says: “HMRC seriously value the service providers such as Leyton as they act as a robust screening process. They know that Leyton won’t put anything into their reports that would not qualify in line with the legislation.”
Emphasising the point, the nation’s average of further enquiry into reports is 16% (one in six). Leyton UK’s record is 0.7% (less than one in 100).
“Conventional wisdom would suggest I would merely tell my accountant what I’ve done and they would merely cost it,” said one ten-man software company in South London. “Leyton took an altogether different approach which didn’t just improve the benefit but did so in a risk-free environment.”
Looking at the bigger picture
A quarter of Leyton’s turnover in 2016 came from optimising claims that hadn’t interpreted the legislation to the full scope of innovators with their businesses.
One of Leyton’s financial consultants, Marco Spiro, says: “It’s natural to draw a conclusion that the direct innovators [engineers, developers] are associated to R&D. The fact is within a technical business there are many people from the CEO downwards that contribute to R&D in one way or another. The important bit is justifying this to HMRC as qualifying indirect expenditure.”
Among Leyton’s larger clients of the FTSE250, there is a sentiment that specialists mitigate the risk virtually completely and prevent their clients from overstepping the boundaries in conjunction with the 80-page legislation whilst getting the most out of the scheme as possible.
“The relationship between reward and risk has become more acute” said one Head of Tax at a major retail chain. “Obviously we want to benefit from the scheme, but not at any cost.”