Risk considerations for research and development work

Accountants’ responsibilities when carrying out research and development (R&D) work have increased, and now require accountants to advise on areas typically outside their expertise. Managing this risk will require close collaboration with specialist advisers, as well as robust mechanisms to minimise professional errors.

Why are insurers scrutinising R&D work?

ACCA’s professional code of conduct prohibits members from providing information to HMRC that they do not believe to be a genuine and accurate portrayal of their clients’ financial affairs and company activity.

Previously, accountants were not required to comment on clients’ R&D tax relief claims if they believed that claim to be spurious or lack technical credibility. Instead, clients would typically work with an independent R&D adviser to produce their claim.

However, since 1 April 2023, there has been an obligation for an accountant’s name to appear on their clients’ R&D tax relief claims.

Most accountants will not have the required scientific and engineering knowledge to adequately assess whether an innovation qualifies as an R&D claim. As such, it will be a significant challenge for accountants to verify such claims to their satisfaction.

If a tax relief claim is submitted and queried by HMRC, the accountant and R&D adviser will have to explain why they deemed the claim to be appropriate. This can be both expensive and time consuming and will likely have negative consequences for firms’ fee income.

What’s more, where an accountant verifies claims that are later rejected, it could negatively impact the accountant’s reputation. Inaccurate guidance on the availability of relief may also lead to substantial financial repercussions for clients, including potential penalties from HMRC. Damages may be sought against the accountant where clients deem them to have acted negligently.

Factors affecting underwriting decisions

Insurers will pay close attention to a firm’s exposure to R&D risks when deciding whether to extend cover. Questions will typically revolve around the extent of the firm’s engagement in the tax claim, and the extent to which specialist advice has been sought.

Factors particularly affecting insurers’ underwriting decisions include:

• whether the accountants have prepared the narrative for the R&D tax claim
• whether the accountants have prepared the calculation
• the amount involved
• if a third-party tax consultant/R&D specialist has been used
• if third party advice is excluded by the accountants’ T&Cs
• whether the tax specialist is still trading and whether they have professional indemnity insurance (PII).

Firms that undertake R&D work should ensure they are thoroughly prepared ahead of their insurance renewal. As ever, firms who can provide insurers with detailed information regarding their work and risk profile will stand the best chance of securing strong terms at their insurance renewal.

Risk considerations for accountancy firms

Accountants should not overlook the heightened risk that R&D work presents.

Many firms will look to disengage with clients pursuing claims that are obviously spurious. However, broader decisions around how and whether to proceed with R&D work will likely require more nuance and will vary depending on firms’ specific circumstances.

Prior to and during R&D work, firms should:

• seek expert advice to ensure innovations are correctly understood and evaluated, including in the event of a claim
• ensure they have dedicated sufficient time and resource to reviewing clients’ R&D claims to allow for proper assessment, and understand and minimise errors
• ensure letters of engagement are clearly defined, stipulating what the firm will and will not do, and ensure advice given falls within this definition
• educate staff on the requirements relating to R&D work, and implement processes to prevent them advising on matters outside their expertise.

Accountants should also consult the Professional Conduct in Relation to Taxation (PCRT), which sets out the professional standard that are expected of members when undertaking tax work.

Visit our accountants page for more information.

Catherine Davis – ACCA relationship manager, Lockton

Lockton is ACCA’s recommended broker for professional indemnity insurance.

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Do not miss this article in this month’s edition on a landmark ruling in a case on R&D tax credits for software development.