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Let’s get fiscal – How to understand R&D Tax Claim Eligibility

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Accountancy firms are increasingly recognising the significant potential of providing their clients with an in-house R&D tax claims service. Not only does it offer an additional revenue stream at a time when margins for compliance services are being eroded, but it is a service clients are actively looking for from someone they consider a trusted advisor.

With the rumoured complexity of the claims process – and with HMRC clamping down on risky and potentially rogue claims –  it is understandable that some firms may continue to be daunted by the thought of embarking down this route. However, as Mike Dean, Managing Director, WhisperClaims, explains, understanding your clients’ eligibility (whether you’re an accountancy firm or a specialist consultancy) is a straightforward process, as long as you break it down into three simple steps.

HMRC Eligibility

Before firms can start to review their client (and/or prospect) base for potential R&D tax claimants, it’s important to understand the key criteria HMRC stipulates.

1) The work is in an area of science or technology

This is the most basic criteria for eligibility—the work must be being carried out in an area of science or technology. If you can’t relate your client’s work to one or more areas of science or technology, it’s not eligible. It’s also important to note that research carried out in an area of social science isn’t eligible.

2) The work is structured as a project

HMRC defines an R&D project as a “number of activities conducted to a method or plans in order to achieve an advance in science or technology”. They also state that a project “may be part of a larger commercial project”. So, what does this mean for your client and their tax claim? Essentially, they must have planned their work and have set out to achieve an advance, rather than just doing day to day work and stumbling across it.

3) The work seeks to make an advance in science or technology

So, what is an advance in science or technology? It’s as simple as it sounds—the outcome of the project represents an increase in overall knowledge, however small, in an area of science or technology. However, applying this to the work done by a company can be more complicated. HMRC lists four areas of activity in which a company might seek to make an advance and are therefore eligible for R&D tax relief:

  • Work that seeks to extend overall knowledge in a field of science or technology;
  • Work that seeks to create a process, material, device, product or service which incorporates an increase in overall knowledge or capability in a field of science or technology;
  • Work that seeks to make an improvement to an existing process through scientific or technological change;
  • Work that seeks to duplicate an existing material, device, product or service in an improved way using science or technology.

4) The company encountered technological uncertainty during the project

Simply put, a project has technological uncertainty if your client was unsure at the outset whether it was technically possible to achieve the desired end result. This usually involves some level of both commercial and financial risk, and experienced staff scratching their heads!

5) The company used competent professionals in the area of science or technology to carry out the work

This is as straightforward as it sounds—HMRC wants to be sure that the project was challenging for people with qualifications and experience in the area of science or technology!

With knowledge of these key criterias, the first step in establishing a claims review service is to undertake an eligibility review.

Step 1: Review the client base

There are three distinct categories of companies that a firm needs to consider – and each involve quite distinct ways of identifying eligibility: 

  • Clients and prospects already claiming R&D tax relief;
  • Clients and prospects that have claimed in the past, but are not currently claiming;
  • Clients and prospects that haven’t claimed before.

Clients that are currently claiming are just that: companies that have made a claim for a recent financial year, and for whom the most recent claim year is still available. This is by far the easiest category to assess for eligibility. The main issues to think about here are:

  • Who prepared their most recent claim? Your company, or a third-party?
  • If the claim was prepared by a third-party, are you happy with the eligibility of the claim?
  • Was the recent work claimed for ongoing, or a one-off?

For companies who have claimed in the past, but are not currently claiming, it is important to understand why. In some cases, companies will know that they are not undertaking eligible R&D; in others, they may feel that previous claims were too small to justify the work involved in preparing the claim (note: automated R&D tax claims software can help here). It may be that there have been changes in the company structure or management, and making a claim for R&D tax relief has dropped off their radar. However, it can also be the case that a company had a bad experience with a third-party provider during their last claim.

In general, once you’ve identified which of your clients fall into this group, it’s a fairly simple process to assess whether they’re likely to be eligible. Having claimed in the past, these companies are also likely to have some understanding of the types of work that they can claim for, and so should be able to work with you to ascertain whether they’ve undertaken any of that type of work more recently.

The final category to consider covers clients that have never claimed R&D tax relief, along with prospective clients for whom you don’t hold information about their R&D claim history. Assessing these clients for eligibility isn’t easy, but there are ways to use information you already hold to make it a lot easier. The aim of this analysis is to enable you to focus your efforts on the clients most likely to be able to make a claim for R&D tax relief.

Ways to achieve this initial analysis include SIC (standard industrial classification) code segmentation (how likely it is that a company operating in that sector would be carrying out eligible R&D?); identifying indicators of R&D in annual accounts, such as grants received, large subcontractor costs, increase in raw materials spending, and costs linked to patent applications.

Step 2: Tackling obvious and less obvious cases

Obvious R&D cases will typically tick most, or all of HMRC’s eligibility criteria, e.g. they operate in a technical sector; employ technical staff; have costs attributed to R&D in their accounts; have made successful R&D claims in the past; or are a technical start-up.

However, companies with large R&D costs and obvious eligibility will have found themselves regularly targeted by third party R&D consultancies, potentially leading to R&D sales ‘fatigue’. The key here is to emphasise how your role as a trusted advisor can provide them with a more tailored and appropriate service than third parties, whether this is through your fee structure or the way you work with them to prepare the claim.

A less obvious R&D case will usually tick one or two of the boxes described above, but it may be difficult to make a definite decision about their eligibility without talking to the company’s management team. It’s also important to manage the client’s expectations—you don’t want to lead a company to believe that they’ll be able to claim R&D tax relief before establishing eligibility.

However, again, your position as the company’s accountant can be incredibly valuable. You’re already in regular contact with the client and will be able to ask questions about R&D without having to sell services upfront.

Step 3: Assess Risk

In terms of R&D tax relief claims, the eligibility of a claim and the risk of the claim being investigated by HMRC are not directly related. In fact, the risk of a claim being investigated by HMRC has a lot more to do with certain other factors than eligibility, which is why it is important to think about the risk of submitting a claim alongside assessing its overall eligibility.

However, if you’re not convinced about the eligibility of a claim, you should never submit the claim to HMRC, regardless of how low you feel the risk is!

The purpose of the risk assessment is to allow you to proactively mitigate the risks inherent in any eligible claim, and to prepare yourself and the client for HMRC’s response in the case of high-risk claims.

The most common risk factors that may lead to HMRC investigating a claim include: company sector; ratio of claim size to company turnover; company age; grants; complications from company structure; and the amount of technical narrative included within the project details.

Again, having access to dedicated R&D tax claims software that includes a risk assessment, can be helpful in supporting you and your clients in this final step. Even better if the software is backed by an expert R&D tax claims support team who can steer you in the right direction and give you confidence that your claim is robust before submission to HMRC.

Conclusion

Understanding R&D tax claims eligibility and providing clients with a trusted R&D tax service is readily achievable and doesn’t need to be a complex or costly undertaking. With companies of all sizes actively seeking support from their accountants to fulfil this role, it is a potential revenue stream and value-added service that cannot be ignored, and with the right support isn’t as challenging to deliver as you might have imagined.

Finance

Crypto’s tipping point

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Chris George, Senior VP of Product at Somo argues that Crypto needs to improve its scalability to be taken seriously

Cryptocurrencies are no longer the exclusive domain of high risk financiers or tech Bitcoin jockeys, willing to ride a niche and volatile asset for good or ill. Today, neobank and mainstream banking apps alike offer crypto banking, helping them trade in Bitcoin or Ethereum from as little as one dollar(https://www.revolut.com/crypto/).

Indeed, in September 2022, Finbold reported that British citizens had invested nearly £32bn in cryptocurrencies, and additional research from HMRC would have it that one in 10 UK adults has bought crypto, double the number from the previous year. 

But even given the legitimacy lent to crypto by the fact that now 50% of UK banks allow customers to interact with these currencies as well as other digital assets, how can the asset management industry turn it into a significant – and mainstream – asset, particularly in today’s turbulent economic climate? With the collapse of FTX, this must be taken into serious consideration. FTX was sold as being a safe and stable way to trade digital currency, alas this has not been the case. It turns out Sam Bankman-Fried seriously over-promised and dramatically under-delivered, gambling away customer assets and ultimately prioritising fraud and malpractice.

First, we need to acknowledge that not all crypto is created equal. Some, such as Bitcoin or Ethereum, do function as a currency, are limited in volume and therefore can increase and (as 2022 amply showed) decrease in value. But other blockchain-based crypto doesn’t behave like what most people commonly accept as currency at all. 

For there to be significant uptake in crypto as an asset, there is going to have to be a far broader and deeper understanding of what it is and what it can do. As Christophe Diserens, chief compliance officer at SwissBorg has suggested: “Value and useability are going to be key. Metcalfe’s Law has been used to value tech and internet stocks so why not crypto?”. That value took a bit of a beating during the recent sell-off and crypto’s perceived volatility will need to be addressed if it is to achieve scale. Because that’s what it’s going to need if it’s ever going to be considered as a legitimate global payment alternative in the future.

 

The role of The Merge

Not the latest B-movie, sci-fi flick, The Merge in September 2022 saw the world’s second-biggest cryptocurrency, Ethereum, move from a ‘proof of work’ to a ‘proof of stake’ protocol. This was nothing short of seismic. 

Proof of work is how the vast majority of crypto has been mined to date. People solving complex equations to validate transactions (the ‘work’) uses masses of computer processing energy, accounting for a significant slice of the world’s electricity consumption. In today’s climate (in both senses of the word), that’s just not on. 

Proof of stake, on the other hand, relies on far fewer ‘miners’, fewer computers and less energy as a result. This so-called ‘Merge’ is not only expected to reduce worldwide energy consumption by 0.2%, but also boost the crypto economy as a whole, creating more opportunities for investors and allow developers to build more products and applications on Ethereum. Ultimately, it could be what drives the decentralised internet of blockchain, crypto and NFT – Web3 – mainstream. 

What does this mean in the ‘real’ world? This could present a real opportunity for the financial services sector as a whole. It will change the way it operates, speeding up transactions, creating new business models and generally just making the whole thing a more efficient way of working. Fully cashless payments for business would be a real boon, given the costs and potential losses involved in transacting in cash. Digitisation also makes transacting an altogether more intuitive experience. 

One thing crypto and its associated technologies and solutions needs to be wary of is becoming a solution in search of a problem. For a truly mainstream breakthrough, the industry needs to make sure it’s bringing the consumer along on the journey. For end users to be truly confident in crypto, it has to benefit from the same levels of governance and regulation that cover the rest of the financial services industry, building and maintaining consumer confidence will be extremely important as trust levels have been shaken by the recent lack of solid administration and “irresponsible lending practices” leading to the FTX implosion . It has to be simple to transact, but with all the protections that investors have come to expect. It can’t afford to take them on another rollercoaster ride like 2022’s. 

While 50% of the UK’s banks may be getting on board with crypto to some degree, there is still a wide open ocean of opportunity for asset management players to realise value for themselves and their clients. It will involve some reshaping and more investment in digitisation to manage the assets of the future, whatever they may be. 

Somo, part of the CI&T family, will be publishing a report titled ‘Assessing the Crypto Conundrum: Will cryptocurrency ever be a significant trading asset and how can digitalisation shape its future?’ in 2023. 

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Skedadle to change the game for advertising with Currencycloud partnership

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Currencycloud, the experts simplifying business in a multi-currency world, has partnered with Scottish start-up app Skedadle to provide its users an easy, secure and seamless way to transfer money earned in-app while playing games on public transport.

Skedadle rewards travellers for the time they spend playing on-the-go. They can earn £2 per day simply for playing games on the move. That’s an extra £60 in their pocket each month. This can be done thanks to a disruption in the advertising market, by using algorithms to verify and track the users’ engagement with ads, proven to be higher while playing than in traditional online advertising, which increases product and brand recall for advertisers. Thanks to the partnership with Currencycloud, Skedadle users can use the app on public transport and be reassured that all financial transactions and financial data comply with the highest standards of security and validations.

By connecting to Currencycloud’s API technology, Skedadle has been able to integrate in their app a state-of-the-art payments ecosystem that seamlessly bulk settles the money earned from advertisers into a secure account and then processes withdrawals from users fast. At the same time, Currencycloud also sets the infrastructure that will enable them to grow both geographically in the UK and globally, by providing access to 38 currencies and low cost, fast FX rates.

Says Nick Macandrew, CEO and Founder at Skedadle: “Trust and security are crucial, especially when it comes to people’s money. As we rapidly grow our platform, we need a solution that can keep up with our pace and Currencycloud do just that. Our cutting-edge technology requires a secure, stable, and simple way of managing payments, whilst guaranteeing the best user experience possible.”

Nick Cheetham, Chief Revenue Officer at Currencycloud commented: “Backing bold start-ups from day one has always been part of our DNA. Skedadle’s creation of new revenue streams for travellers and advertisers alike is an exciting business endeavour. We are eager to see how the  platform can grow and disrupt the market by integrating our seamless payment capabilities.”

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