Association of Accounting Technicians– Written submission (DFG0007)

Introduction

AAT is a professional accountancy body with approximately 50,000 full and fellow members and over 90,000 student and affiliate members worldwide. Of the full and fellow members, there are more than 6,000 licensed accountants who provide accountancy and taxation services to over 600,000 individuals and small/medium sized British businesses.

AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

AAT response to inquiry questions

Please find below responses to those questions that AAT has specific views on for this inquiry.

Have the changes to the definition of R&D gone far enough in modernising R&D relief, and if not, what more needs to be included

The draft legislation references changes to the definition of R&D to remove the exclusion of pure mathematics and an extension of the scope of qualifying expenditures to include the costs of data sets and of cloud computing. AAT has previously commented that there was a strong case for bringing data and could computing costs within the definition of qualifying expenditure and welcomes this inclusion.

Whilst these changes will help ensure that the relief is more reflective of modern business practices, they appear to be driven by a reaction to an increase in the number of businesses experiencing these types of costs rather than as a result of a wider review of the definition.

How effective will the changes be in countering error and fraud resulting from spurious R&D claims and is there more that can be done, or different approaches that could be adopted?

AAT notes the measures that aim to address spurious claims and improve compliance, and whilst these measures are likely to enhance HMRC’s abilities to target its compliance activities, there needs to be greater clarity as to how specifically each of the measures will reduce erroneous claims.

AAT notes the plethora of unqualified, unregulated agents currently providing advice to businesses in relation to R&D Tax Credits and the impact this has on error and fraud. In 2019, unregulated agents were estimated to have encouraged businesses to overclaim R&D Tax Credits by over £600m[1].

As AAT has highlighted on numerous occasions, this issue could be easily resolved by requiring anyone giving paid for tax or accountancy services to be obliged to be a member of a recognised professional body. Regrettably, in sharp contrast to the increasingly tight regulation of auditors, there does not appear to be any political desire to address the issue of unregulated high street agents, whether operating in the R&D space or any other areas of the economy. The fact that two thirds of complaints about agents relate to the third of agents who are unregulated should be a sufficient warning to policymakers that action is urgently required. 

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How aware are smaller businesses of R&D relief? Is there more that HMRC could be doing in practice to help smaller businesses access relief to which they are entitled?

AAT is of the view that there is still an insufficient level of awareness of R&D relief amongst smaller businesses. Many will be unaware of the complexities involved and will be fearful of finding themselves on the receiving end of HMRC enquiries. This undoubtedly means that many small businesses are failing to claim relief to which they are entitled.

As referenced above, the impact of the lack of appropriate regulation in the tax advisory market is a significant contributor to this issue with many small businesses unable to understand the spurious and/or unscrupulous advice that they have received from unregulated agents which will doubtless result in further reluctance amongst small businesses to engage with what ought to be a highly credible tax relief.

How helpful is HMRC and BEIS guidance in interpreting and applying the R&D relief rules?

HMRC’s guidance is not sufficiently clear and therefore does not support smaller businesses in helping them to avoid errors. However, these businesses should be able to rely on the guidance and advice from tax agents, and as referenced above, unless more is done to improve the standards of the tax advisory market, then the shortcomings in HMRC’s guidance only helps to further confuse businesses and will continue to result in spurious claims and non-compliance.

Greater usage of updated case studies within HMRC’s guidance would help to improve understanding and in turn reduce the time HMRC needs to spend on compliance activities.

What is your experience of HMRC’s approach to dealing with claims to R&D relief which it suspects to be invalid, either through misunderstanding of the rules, or fraud?

In our response to the 2021 HMRC & HM Treasury consultation on R&D Tax Reliefs, we noted that the consultation document stated that in some countries, such as the US, “…a company can expect to be audited by the tax authorities on nearly any tax credit claim”. There is no reason why the same could not be true in the UK. With regard to the responsibilities agents and the applicant company being better reflected in the claims process, AAT actively promotes member awareness and understanding of R&D Tax Reliefs and has previously suggested Government consider imposing joint liability on agents and taxpayers alike[2].

Although the British tax system is designed so that accountability lies with the taxpayer, whether or not an adviser has been used, joint liability would potentially be a more appropriate approach to take given this is likely to better reflect the reality of many tax advice situations. In Portugal the agent is liable for any fines and debts whilst the client is still responsible for ensuring the correct amount of tax is paid, ensuring no taxpayer unduly benefits from the mistakes or misdemeanours of their adviser.

Are there lessons the UK could learn from the tax systems of other countries about how to encourage R&D?

AAT, as stated before[3], believes a more ambitious target should be set of ensuring the UK is in the top ten countries for R&D spend by 2027.

The UK target is well below what leading countries are currently investing e.g. South Korea (4.3%) Japan (3.4%) Finland (3.2%) Switzerland (3.2%) Austria (3.1%) Sweden (3.1%) Denmark (2.9%) Germany (2.9%) USA (2.7%)[4] . It is also worth noting that most of these countries have a stated objective to increase their R&D spend as share of GDP further still. For example, Finland has a 3.2% investment rate today but is intent on raising this to 4% by 2030.

There are a number of countries, such as the US, Spain and Portugal that vary their rates of R&D support by sector and activity. Similarly those countries with the highest levels of R&D investment do so as well e.g. South Korea, Japan and Finland. In light of both the UK’s “net zero” ambitions, it would seem both consistent and desirable to encourage greater additionality in the sphere of environmental R&D and this is therefore something that AAT would support. Perhaps a genuine “super deduction” like the 150% provided for in Finland from January 2021 until 2025 would be sufficiently game changing to deliver a step change in R&D.

How successful are the changes in R&D relief likely to be in encouraging innovation and development?

AAT considers that the changes, whilst aimed at reducing spurious or erroneous claims, may actually result in a reduction in claims altogether as the measures will increase the administrative burden placed on all businesses.

27 October 2022