Research and Development: errors to avoid
Fly-by-night ‘experts’ land wholesale beer business with tax bill of over £500,000.
A company undertaking an innovative research and development (R&D) project may be able to take advantage of significant tax breaks. Unfortunately, the availability of tax relief can also attract fraudsters. A typical fraud sees rogue firms posing as specialist advisers, submitting R&D claims for their clients, and creaming off the proceeds – leaving behind a claim that may later fail HMRC scrutiny. This was what taxpayer business, Beer Express Ltd, found to its cost at the First-tier Tax Tribunal, recently.
Tax relief
R&D tax relief comes via two schemes. The new merged R&D scheme offers a 20% above-the-line taxable credit: and the enhanced R&D intensive support scheme (ERIS), available to loss-making, R&D-intensive, small and medium-sized enterprises, provides an enhanced deduction of 86%, and a potential repayable tax credit. Financially, the stakes can be high and unscrupulous so-called advisers know this.
Rogue advice
Beer Express, though primarily a wholesaler, also owns a pub, the Penny Gill, and markets products of its own, such as Penny Gill Lager and Beer. In 2020, it started two new projects, one using forecasting software to optimise its inventory, and the other to develop a new, uniquely-flavoured pale lager. Two further projects followed, one a software development project, and the other to develop its brewing offering.
The business was approached by a firm holding itself out as an R&D specialist. It suggested that the work being done would qualify for tax incentives under the R&D Guidelines. The firm was duly appointed and obtained a tax refund, paying this to Beer Express after deduction of fees.
In 2023, HMRC rejected the R&D claim in full, and asked for repayment of the refund. When Beer Express attempted to contact their ‘advisers’, the firm appeared to have disappeared.
Rules matter
Broadly speaking, to qualify as R&D for tax purposes, a project must involve the resolution of uncertainty to achieve an advance in science or technology, and fit within the rules set out in ‘Guidelines on the meaning of research and development for tax purposes’ on GOV.UK. Further specific requirements also apply, such as the need for a project to be overseen by a competent professional or person with relevant expertise. The Tribunal decided that Beer Express failed to qualify in these areas.
The Tribunal found that the company owner, although truthful and credible, did not have any in-depth knowledge of the projects: ‘Although he may have overseen the projects or had a vision for the future . . . he had not been responsible for the design, creation, planning and implementation such that he satisfied the Guidelines as a competent professional’. The company had thus failed to provide clear and cogent evidence of the advance being sought; the technical uncertainty involved; or the reason that additional research was needed. It lost its case.
Eligibility requirements for R&D for tax purposes are complex. Do please contact us for further advice.