Last autumn, a landmark court judgement was delivered against HMRC after its denial of £1m worth of research and development (R&D) tax relief to construction firm Quinn (London) Limited. R&D tax credit consultancy ForrestBrown successfully appealed the judgement on behalf of Quinn. Here James Dudbridge, Director, and Gareth Randle, an engineering sector specialist, both from ForrestBrown, discuss what the ruling means for businesses in the construction sector, and explain how they can avoid common pitfalls when approaching R&D tax relief.
With the reality of tightening budgets and ongoing resource and supply-chain issues, innovative construction and engineering projects are at risk of falling off priority lists. For those businesses wishing to resist this change while managing the financial risk, R&D tax relief can offer a lifeline. Yet claims should not be taken out in haste – building a case on firm foundations is key to avoiding mounting scrutiny from HM Revenue and Customs (HMRC).
A recent rise in spurious R&D claims has triggered a heightened number of enquiries from HMRC, increasing the risk of challenge to genuine claims, and putting an important financial resource for the construction and engineering sector in jeopardy.
What’s more, HMRC has said that it will continue to review the eligibility of customer-led R&D projects, despite the successful ruling against HMRC in the Quinn tribunal case. In this case, HMRC’s enquiry centred around the use of multiple sub-contractors and funding sources, a factor common in many construction and engineering claims by nature of the industry. With similar claims remaining open to challenge, it’s imperative that businesses within the sector exercise caution going forwards.
Of course, that’s not to say that construction and engineering firms should be put off making a claim. In these challenging times, R&D tax relief remains a valuable source of funding for innovation. Yet, it’s imperative for businesses to be aware of the issues and the proactive steps they need to take to protect themselves in the event of an enquiry.
The risks of getting it wrong
The opportunity for a significant tax relief reward naturally comes with a level of risk. If HMRC decides to investigate a claim and finds any part of it to be inaccurate or invalid, the consequences can be much larger than simply being denied funding or having to pay some of the previously awarded relief back. Substantial sums may be required to rectify the situation, and the reputation of the company and likelihood of future claims being accepted can be severely impacted.
More extensive searches are becoming more common. If HMRC uncovers a mistake for just one claim, it has tools at its disposal to extend that assessment into claims as far back as six years ago (and even further in the most serious cases). This means the total amount under assessment can quickly mount up to a potential crisis for businesses – or even pose an existential threat. In the recent case of Quinn, for example, £1m of relief was under HMRC’s microscope.
In a market where noise from unregulated agents can make it difficult to know who to trust, a striking number of applicants aren’t aware of the risks involved in getting a claim wrong. However, if a firm approaches a claim with the knowledge of how to get a filing position right, as well as understanding the mechanism required to protect their claim from enquiry, they can be confident their cashflow and reputation will remain intact throughout.
How to ensure a claim stands up to scrutiny
Getting a claim correct starts with picking the right adviser. Don’t assume that an adviser is regulated, nor that they have the best interests of the business at heart – there are a lot of spurious advisers out there, so examining their credentials is vital. Furthermore, look for a company that has a balance of skills and ideally specific experience in the sector. With the construction and engineering sector facing unique and challenging hurdles, claims will be best handled by an experienced firm.
Claims should be a collaborative effort. Passing over all claim prep to an agent can leave the process vulnerable to gaps in knowledge of how the business actually operates. Sharing detailed information on commercial operations will ensure that all nuances are worked into the claim.
A one-size-fits-all approach isn’t going to stand up against a HMRC investigation and often proves to be more resource intensive for the business, and so the more questions an adviser asks and the more honest information that’s offered up, the easier the business can rest that a claim will be valid. After all, it’s better to be challenged by an adviser before a claim is made than by HMRC once it has been submitted.
Record keeping throughout this claim prep and more widely on how information is recorded on key systems is also vital. If there is a detailed paper trail of the thought processes, any concerns can be addressed should HMRC start asking questions.
Lastly, HMRC’s approach will continue to evolve. In fact, there are big conversations currently happening at policy-level that could significantly affect rulings going forward. Even if a business has filed a successful R&D claim in the last few years, the boundaries may have changed since and so a copy-and-paste job shouldn’t be relied upon.
Overall, R&D tax credit relief helps businesses be innovative, forward thinking and progressive. Demonstrating these qualities could be key to standing out in the crowded construction and engineering market despite the current market challenges. Yet, the risks shouldn’t be overlooked.
While many claims pass through the system without facing an enquiry, failing to properly think through a claim with the help of an adviser or consider the possibility of an investigation could leave the business out of pocket. It could also impact the business’ access to the relief going forward. Proper preparation and relative caution will open up assured opportunities to flex technical muscles and attract the right clients and talent to the business.