R&D tax claims – professional conduct and fees

As HMRC focuses on the veracity of research and development (R&D) tax incentive claims, Craig Flynn CTA, VIP R&D consultant at Croner-i, examines professional conduct and fees.

There has been significant commentary in the press over recent months regarding research and development (R&D) tax incentives claims. An area which has come increasingly under scrutiny is the behaviour of R&D tax incentives claimant companies and their professional advisers who have had some involvement in the preparation of the R&D claims and/or the corporation tax computations including the claims.

Professional conduct in relation to taxation?

ICAEW has published guidance on?Professional Conduct in Relation to Taxation?which I and other members of that Institute should follow in carrying out our work.

This guidance extends to consideration of R&D tax incentives claims. It is noted that the guidance was jointly produced by different accountancy and tax institutes.

Section 2.2 to the guidance refers to professional behaviour ‘to comply with relevant laws and regulations and avoid any action that discredits the profession’. In addition in the objectivity section 2.6 to the guidance it is stated that ‘a member must explain to their client the material risks of the tax planning or tax positions and the basis on which the advice is given’.

Both of these sections are considered relevant to the provision of advisory services in connection with R&D claims.

Material risks associated with tax positions apply to R&D tax incentives claims, for example, whether or not qualifying R&D expenditure should be regarded as subsidised or subcontracted potentially giving rise to claims for relevant projects under the large company (RDEC scheme) as opposed to the SME scheme and there has been relatively recent case law including a First Tier Tribunal (FTT) judgment involving?Hadee Engineering Co Ltd v Revenue & Customs,?followed by a later case?Quinn (London) Ltd v HMRC?.

We believe that clients should be made aware that it is possible that HMRC may take a different view on R&D eligibility and the basis of claims than that as per the submitted R&D claims filing position.

Our recommendation is that R&D transmittal letters sent to clients by professional advisers who are involved in the R&D claims clearly document the ‘material risks of the tax positions and the basis on which the advice is given’.

Professional conduct and due care

The paragraphs in the section on professional conduct and due care are considered relevant to advisory work in connection with R&D claims.

Section 2.2 states that ‘a member must carry out their work with a proper regard for the technical and professional standards expected. In particular, a member must not undertake professional work which they are not competent to perform unless they obtain appropriate assistance from a suitably qualified specialist’.

Suitable specialists advising on R&D tax incentives claims could include technical?industry specialists who should be professionally qualified to assess R&D project eligibility, eg, engineers, traditional scientists and computer scientists as well as chartered accountants and chartered tax advisers having a good grasp of relevant accounting and tax issues, preferably with significant experience of R&D claims.

Specialists who have working experience in the larger and/or more reputable accountancy firms as well as HMRC should be in a good position to adopt professional conduct and due care in their R&D tax advisory work.

Professional behaviour

Paragraph 2.23 of the guidance notes that ‘a member must comply with all relevant legal and regulatory obligations when dealing with a client’s tax affairs and assist their clients to do the same. A member who has reason to believe that proposed arrangements are, or may be, tax evasion must strongly advise clients not to enter into them. If a client chooses to ignore that advice, it is difficult to envisage situations where it would be appropriate for a member to continue to act other than in rectifying the client’s affairs’.

The submission of R&D tax incentives claims to reduce or eliminate corporation tax liabilities or generate corporation tax refunds could constitute tax evasion in situations where the claims are not supportable and there was fraud involved.

Accountants and other professional advisers who act for clients who submit R&D tax incentives claims which they believe represent or may be construed as tax evasion should consider paragraph 2.23 and whether or not resignation as professional advisers is the correct course of action.

Standards for tax planning?

Section 3 in relation to standards for tax planning is considered of some relevance to R&D tax incentives claims.

Where HMRC is known to take a different view of the law and the possibility of litigation is considered it is increasingly more relevant in connection with R&D claims. Professional advisers need to be very careful to advise their clients of different possible interpretations of the law, the significant potential duration of HMRC enquiries which could occur and the possible requirement to appeal to the FTT and beyond to strive to arrive at a satisfactory conclusion.

There is commentary on professional judgment and appropriate documentation, which states that ‘applying these requirements to particular client advisory situations requires members to exercise professional judgment on a number of matters. Members should keep notes on a timely basis of the rationale for the judgments exercised in seeking to adhere to these requirements’.

I have referred above to the suggested recording of R&D project and R&D cost eligibility calls but for cases where clients do not allow this to happen detailed meeting notes of the issues discussed and basis of decisions is recommended.

R&D transmittal letters should detail rationale for judgments on the R&D project and R&D cost eligibility, basis of R&D claims, etc. The maintenance of real time technical documentation to support the view that projects are seeking an advances in science or technology and/or striving to resolve scientific or technological uncertainty is recommended to support R&D claims.

Professional fees

There is a wide range of options available to clients regarding professional fees for assistance in R&D claims, including contingent fees, time basis and fixed fees.

Contingent fees where professional fees are proportionate to corporation tax savings arising as a consequence of R&D claims are considered to be the most common charging basis and rates vary from 5% up to 35% of the cash tax benefit clients receive.

ICAEW has published guidance in relation to determining the basis for charging fees. The paragraphs on threats to objectivity and contingent fees are considered particularly relevant to professional advisory services in connection with R&D tax incentives claims.

It is stated in the guidance notes that ‘contingent fees will only be acceptable if the way in which the fee is set does not create, or would not be seen by the reasonable and informed third party to create, insurmountable threats to objectivity: the economic incentive inherent in high risk arrangements to advise in a certain manner, to a point that outweighs professionalism, must be safeguarded against or the work not undertaken.

‘Heightened awareness is therefore needed to ensure that the fee arrangement does not result in the member being, or being seen to be, partial to one outcome rather than another in order to benefit from increased fees.’

There is a view in connection with contingent fees, which HMRC may take when considering penalty exposure, that where contingent fees are high in either absolute or percentage terms for R&D claims it is possible that qualifying expenditure could have been inflated above the claimable amount partially due to the actions of the professional adviser.

In addition, where contingent fees are relatively low, eg, 5%, there may be a view that this ‘outweighs professionalism’ in that it is not possible for the professional advisers to carry out sufficient review work and due diligence to arrive at a conclusion that the submitted R&D claim is supportable.

The final point on professional fees is the importance for a clearly defined scope of work as articulated in engagement letters and contracts between professional advisers and their clients.