More needs to be done to regulate R&D tax credit to weed out poor advisers

On 1 June 2020 the CIOT (Chartered Institute of Taxation) introduced new guidance for members on the application of Professional Conduct in Relation to Taxation surrounding R&D tax credit services. While this guidance is welcomed, RSM feels more could be done.

As in other industries, tax professionals could be subject to registration and accreditation. This may involve a “fit and proper” test, and requirements to hold relevant qualifications and experience. Such a scheme would enable HMRC to take disciplinary action where advisers fail to meet the required standards. Advisers who don’t meet the standard could be subject to a higher level of checks for a specified period, or ultimately being stripped of accredited status if inadequate performance continues.

Too many advisers hide behind the lack of disclosure requirements, meaning HMRC is often unaware of their involvement where they are not the registered tax agents for the claimant.  HMRC could insist on mandatory disclosure of whether advice was taken and by whom, providing them with enough information to properly assess advisers. The risk rating could then be used to track the level of enquiries faced by those rated as high risk. 

HMRC also has a pivotal role in driving up standards. Given the rising level of questionable claims, increasing the level of resources dedicated to such claims could potentially generate high returns and pay for itself in recovered tax revenues. Any successful self-assessment system requires not only ethics and standards, but a robust compliance process that provides a real deterrent to such abusive practices. 

Greater scrutiny and risk assessments would also help prevent advisers taking the view that if HMRC processes a questionable claim then this provides a mandate to pursue similar claims on the basis that HMRC has approved such claims. Risk assessing advisers and better targeting of specific sectors or types of claim where problems are identified would help drive up quality in the long run.

Experience in other countries such as Australia has demonstrated that more draconian or extreme measures may be needed to reduce the number of poor claims and an ever-increasing treasury budget. Measures such as tightening up the definition of eligible R&D, restricting access to the regime for certain claimants, or creating a larger qualifying de-minimis spend could all be considered.  Ultimately though, such changes would reduce the effectiveness of the regime and represent a backwards step that could be avoided with some tweaks to the existing claim system. 

HMRC openly acknowledges its concern around some of the practices it is seeing. The decision in the recent Tribunal case (AHK Recruitment Limited v HMRC) demonstrates that HMRC can successfully challenge where it sees poorly evidenced claims.

R&D tax credit is a powerful tool for incentivising UK businesses to innovate and invest in technology and the rules and legislation are strong, fit for purpose and successful.  However, care is needed to preserve the regime’s integrity by encouraging higher quality claims and discouraging malpractice.