Accountants’ responsibilities when carrying out research and development (R&D) work have increased, with accountants now required 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 March 2023, HMRC has sought to tackle abuse of R&D reliefs by requiring that all claims for deductions or tax credits must be accompanied by a compulsory additional information form. These forms must include details of any agent who has advised the company on compiling the claim, including accountants. Additional forms have been mandatory for all claims since 1 August 2023.

The tougher rules have resulted in 72% of R&D tax relief claims rejected by HMRC, including a third that were initially approved. However, several decisions have been overturned at tribunal.

There are several specialist tax advice firms offering ‘end to end’ R&D advice and assistance, who promote R&D schemes. Many of these are unregulated and do not necessarily hold Professional Indemnity Insurance (PII). Many of these firms have collapsed following the increased challenges made by HMRC. This sometimes leaves the accountant (as the regulated party) in the firing line should any claims be made following failure or a challenge to the R&D submission.

How accountants can become liable

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 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 available 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.

So far there has not been a large volume of R&D claims made against accountants. However, this is likely to increase as HMRC continue to investigate and challenge.

Claims against accountants may arise from:

• undisclosed commissions – for instance, where an accountant receives a commission or introduction fee if they introduced a client to an R&D specialist. Undisclosed commissions may also result in challenges from clients
• lack of clarity – such as where an accountant’s terms and conditions are not clear in defining the scope of their advice
• lack of documentation – where accountants have not recorded the advice they’ve given, even if it’s to say they are not providing tax advice
• late submission of an R&D claim to HMRC – this may arise where there is confusion as to who is completing the submission (eg accountant, tax adviser, or another individual)
• incorrect submission of an R&D claim, such as submitting to the wrong scheme
• under declaring R&D tax relief.

HMRC nudge letters

Since tightening its restrictions on R&D claims, HMRC has issued ‘nudge’ letters to clients for certain applications. Nudge letters do not signal the start of a compliance check, but it does signal that HMRC is looking at the client as a potential risk.

If you or a client receives a nudge letter, it is wise to review and verify the accuracy of the client’s claim. Doing so will ensure that any issues are identified as early as possible.

Nudge letters may be tailored to specific industries. If a claim is submitted in an area for which qualifying activity is deemed unlikely, clients may be more likely to receive a letter.

More information is available on nudge letters and what they entail.

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.

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

Considerations for your professional indemnity insurance

Firms who undertake R&D work should ensure they are thoroughly prepared ahead of their insurance renewal. 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.

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.

Catherine Davis, ACCA relationship manager
catherine.davis@lockton.com

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