RESEARCH & DEVELOPMENT (“R&D”) TAX RELIEF
As we have reported previously on a number of occasions, the R&D landscape has changed significantly over the last year.
Low enquiry rates and risks involved in submitting R&D claims (unless the claim was very large or obviously flawed) resulted in a raft of advisers joining the sector over the last few years, with some advertising services on the promise of ‘free money’ and ‘100% success’, generally charging success fees based on the percentage of the amount claimed.
The amount of SME tax relief given by HMRC grew each year until last summer, when a series of events started to unravel the status-quo and bring in the changes.
- HMRC’s Fraud Investigation Service (“FIS”) were brought in after evidence was found of organised criminal activity within the R&D scheme;
- The Times published articles that suggested a high level of potentially spurious R&D claims were being filed with HMRC, providing examples such as restaurants claiming for new menus;
- The House of Lords’ Finance Bill Sub-Committee released a review of the proposed changes to the R&D scheme;
- Abuse of the SME R&D scheme became a ‘hot topic’ in parliament and in news story headlines.
With significant pressure now on HMRC to assess its own policing of the SME R&D scheme, late 2022 saw the organisation start to make a notable change in direction.
Part 1 – blanket enquiries
The number of R&D enquiries has vastly increased, with HMRC looking to challenge (often in a confrontational manner) projects undertaken not meeting the qualifying R&D criteria as set out in the BiS guidelines.
We understand that HMRC are particularly targeting companies with certain SIC codes (codes starting 46, 47 or 7, 8 and 9) as these are considered by HMRC to be types of business where HMRC believe qualifying R&D is unlikely. The enquiry letters will generally have no HMRC inspector named and will including a long list of generic questions (which demonstrate that the R&D report may not have been read in any detail before the enquiry letter is sent out). On the whole, the blanket enquiries are being administered by more junior HMRC staff, who are often ‘learning on the job’.
Often HMRC will put forward that a R&D claim does not qualify on the basis that:-
- ‘We don’t think this is an advance’
- ‘We don’t think this was an advance for the industry’
- ‘We don’t think you’ve used Competent Professionals’
- ‘We think the work would have been readily deducible to Competent Professionals’
- ‘We don’t think this work was conducted as a project’
- ‘There’s not enough evidence that the work took place’
HMRC will likely defend a blanket approach on the basis that this is an attempt to ‘flush out’ rogue claims and advisers, however the downside is that a number of genuine claims are likely to be ‘caught in the crossfire’.
Part 2 – Targeted enquiries
HMRC have also started raising more targeted R&D enquiries through a separate team.
These can generally be identified as the enquiry will be made by a named HMRC inspector, and the questions will often be specific to the R&D claim report filed, and more detailed. These enquiries are likely to be related to larger R&D claims or where it is clear there are flaws (similar to the historic type enquiries, with more volume).
Part 3 – Changing R&D relief
From 1 April 2023, the additional deduction rate for SME R&D relief will be reduced from 130% to 86%, and the rate of the SME payable credit which can be claimed for surrenderable losses will be decreased from 14.5% to 10% (except for businesses considered to be ‘R&D intensive’).
The R&D Expenditure Credit (“RDEC”) scheme, mainly for large companies, will see an increase in the credit rate from 13% to 20% of qualifying expenditure.
In addition, for accounting periods starting on or after 1 April 2023, new claimants will need to notify HMRC of their intention to make an R&D claim within 6 months of their year-end, and from 1 August 2023 all R&D claims will be required to be filed alongside an additional information page.
Whilst the majority of changes reduce the relief available, or add to the administrative burden, some positive changes include data and cloud computing costs being added to the definitions of consumables and software costs from 1 April 2023. Secondary legislation will also be introduced to extend the scope of R&D relief to cover mathematical advances in and of themselves (‘pure mathematics’).
During the recent March Budget Statement, the government announced it was postponing plans to remove SME R&D Tax Relief on costs associated with subcontractors and externally provided workers (EPWs) based overseas until 1 April 2024.
Based on recent consultations, and the proposed changes to R&D relief from 1 April 2023, it’s very clear that the Government favours moving towards a single, unified R&D scheme for both SMEs and large companies (this is even stated in the policy paper published in November 2022). It’s also clear that the new scheme is more likely to be based on RDEC, the scheme for large companies, rather than on the SME scheme.
We have also already heard of some specialist R&D advisers closing or disappearing, presumably due to the change in landscape, leaving some companies with an R&D enquiry from HMRC and no ability to turn to the adviser that assisted them with making the claim.
The current aggressive approach to challenging R&D claims could be for a number of reasons, including –
- to demonstrate a high level of error in the SME scheme, easing the path to the creation of a single unified scheme that is less beneficial than the current SME scheme;
- as a result of the pressure on The Treasury to increase and/or improve the rate of tax recovery to fund the additional spending and support on Covid-19 and the ‘cost of living crisis’;
- To send out a message to rogue advisers and claimants that the scheme will be policed more thoroughly in future, and they are being monitored.
Whilst there are many problems with the R&D tax relief scheme, it’s still a hugely valuable part of the support offered to technologically innovative UK companies, and it is clear that R&D relief is seen as part of the government’s plans to push increased productivity in business (something that has been suffering in recent history).
Given the increased scrutiny, it is more important than ever to ensure that any R&D claim report clearly demonstrates how the qualifying criteria have been met (which is where we can help) to reduce the risk of HMRC enquiry.
Should you wish to discuss R&D please do not hesitate to contact our offices.