R&D assessments ‘almost impossible’

Assessments on eligibility for R&D tax credits have become ‘almost
impossible’, according to the Federation of Small Businesses.

Responding to the crackdown in the wake of the BE Studios case, Simon
Sweetman, vice-chairman of the FSB’s taxation unit, said the most difficult
claims were over software packages. ‘Those decisions are almost impossible,’ he

Accountancy Age revealed last week that the government was asking
more questions about R&D relief claims after it emerged that BE, a small
software company, appeared to have been paid £150,000 in error.

‘[HMRC] can’t ask more questions,’ Sweetman said, referring to the fact that
many small businesses already face prolonged and complicated investigations over
the claims.

The situation has become so bad that for claims worth £10,000, small
companies might have to pay £5,000 in professional fees to get them. ‘It isn’t
worth the effort,’ said Sweetman.

In the BE Studios case, a High Court judge ruled that the company had
received £150,000 in error, in part because HMRC had failed to ask questions
about the case. BE Studios was not eligible for the credits because it was not
undertaking innovative projects as outlined under government rules, the judge

The same problem is causing HMRC to increase the scrutiny of audit claims.
With up to 50% of cases subject to inquiries, Sweetman said: ‘You have got an
almost impossible situation because the judgment is made by accountants and
inspectors of taxes, asking: “Is it proper research?”’

The BE Studios case has prompted criticism of the scheme, since it suggested
that some claims were going through without proper scrutiny.

BE Studios had sued its former advisers Smith & Williamson for not
advising it could have claimed R&D relief, which it subsequently claimed
through separate advisers. It lost when the judge ruled it did not deserve the
£150,000 claimed in the first place, as Smith & Williamson had argued. BE
Studios has appealed the ruling, delivered in July.

The government is also consulting on potential changes to the system, which
the FSB said it would be contributing to.

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