Risk management for accountants involved in tax mitigation schemes

This article follows on from our "Brief Account" webinar in October 2024. Within the professional indemnity and accountancy sphere we're seeing a rise in claims relating to tax mitigation schemes. Providing advice on tax is one of the many things accountants do, and this can range from basic tax calculations, through to lawful tax planning arrangements for individuals and business of varying complexities. This can be to maximise reliefs and mitigate tax liabilities, through to much more aggressive schemes which are likely to be challenged by HMRC.

There are so many tax mitigation schemes available now and accountants are increasingly asked about them. The changes are fast paced, so accountants need to keep up with them. But what does that mean in the professional indemnity world? Will we see an increase of claims – possibly with more kick backs from HMRC and disgruntled clients?

There have been many changes specifically in the creative industry tax relief world, with changes taking place from 1 April 2024 as to the level of information that has to be submitted with claims to HMRC. There's also been a lot of push back from HMRC for those claiming Research and Development (R&D) corporation tax relief. This is very topical as we've seen lots of claims coming out of them over the last few years. This is likely because applications to HMRC for R&D relief have risen significantly over the last 10 years:

• R&D applications to HMRC were 43,665 in 2015 to 2016, totalling £4.0 billion
• This rose to 89,300 claims, totalling £6.6 billion, by 2020 to 2021
• HMRC expects the cost of relief for claims received in 2027 to 2028 to total £9.5 billion

Possibly this means we'll see even more claims against accountants involved. Whilst R&D tax relief is supposed to help insurtechs, startup brokers and SMEs claw back costs invested in innovation, there has been a lot of concern over abuse and pushing boundaries when making claims - particularly among SMEs. As well as recently inviting R&D over-claimers to come forward and consider self reporting, HMRC have ramped up their analysis of the applications being made, and have taken on a significant number of new case worker investigators. The hired HMRC investigators aren't necessarily as experienced with the complex detail of tax reliefs, too, but the impact on the professional indemnity world is that those making applications are seeking redress elsewhere – from their accountants and in turn their insurers.

We understand that accountants in general are being more cautious in the advice they are giving to their clients about applications – maybe even sometimes suggesting from a commercial perspective that it's no longer worth claiming the relief. But there's also a campaign in the industry to push back a bit more against HMRC - especially when there is no clear rationale for the rejections being faced.
 
So what would the specific risk management advice be for accountants involved in R&D, or any other tax reliefs? Here are our thoughts:

• Scope out clearly in the retainer letter – be clear on who is doing what (sometimes an accountant’s client will do aspects of the applications themselves).
• Are there any specific deadlines that clients need to be aware of? For example 2 years to submit a R&D claim.
• Does a professional need to set down any limits of liability? Should they accord with its professional indemnity insurance? What minimum terms are required by its regulatory board? For example, professional indemnity insurance is compulsory for all ICAEW members who have a practising certificate and engage in public practice and the updated regulations that took effect on 1 September 2024. Generally, accountancy practices will be required to have a £2 million limit for any single claim and in the aggregate (unless the firm’s gross fee income is less than £800,000 or over £50million). 
• Make sure they have the right expert advice from their client (or do they need an external report from a specialist maybe)
• Has the technical input been sought and recorded from the client’s end? For example, again for R&D claims, does the accountant have detailed enough notes from the technical people involved at the client to explain why the technology is innovative and advancing science, and what makes it unique and different.
• Have the right people been involved in explaining the position. Firms need to be on top of the data to make sure the return to HMRC is accurate. Science and technology of course move on, but the applications to HMRC could be submitted up to 2 years later, so it’s important to document the position as at the relevant time. 
• Generally staying on top date on developments re R&D if the accountants specialise or dabble in that work.
• From a practical perspective, if their client’s application is questioned, trying to get one case manager at HMRC would be better. Some accountants will have better connections at HMRC, albeit this is hit and miss. It depends how much R&D they do.

If you would like to discuss any more about this or professional indemnity concerns in the accountancy profession, please contact Neera Malde.

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