Research & Development Tax Relief Update

We have reported over the summer HMRC’s action in halting the payment of research and development (R&D) tax credits, while it investigates irregularities in claims for the relief, bringing in its Fraud Investigation Service. See our blog here.

We have learnt recently that the fraud has arisen from serious crime organisations/gangs entering the system and abusing the relief by submitting thousands of bogus claims.

HMRC have recently provided additional details around the pause in research & development tax credit payments and the delays in their processing times.

Since 1 April, HMRC have received over 8,000 claims, which all need to go through their enhanced scrutiny processes that were announced at the start of the summer to minimize the fraud risk.

A HMRC spokesperson said: ‘We do recognise that these additional checks may cause delays to legitimate businesses and appreciate their patience as we work through these exceptional circumstances. We want to reassure legitimate claimants that we are working hard to expediate claims as soon as we can.”

HMRC have confirmed that the normal 28 payment turnaround for payments (prior to the pause) is now 40 days (we would say from experience that it is longer than this), for 80% of claims.

HMRC confirmed that they have a duty to challenge irregular claims, requesting more information if appropriate, and are doing so.  To date, over 1,000 letters have been issued to claimants which have been identified as high-risk, challenging irregular claims.  The likelihood of a claimant receiving a repayment within 40 days is remote.

HMRC have requested that claimants do not contact the R&D helpline/mailbox to chase their claims. Instead, it has asked agents and companies to review their online account for updates on the status of claims.

The Government published draft legislation for the Finance Bill 2022-23 on ‘L-day’ (20 July 2022), including more details on previously announced reforms to R&D tax relief.  The draft legislation includes confirmation of measures to tackle abuse, which can be summarized as follows:

  • A requirement for companies to disclose details of any agent who has advised them in compiling their claim.
  • From April 2023, all claims will also have to be made digitally, including a breakdown of costs and brief description of R&D, and be notified to HMRC in advance, within six months of the end of the period to which the claim relates.
  • R&D tax relief claims will need to be endorsed by a named senior officer of the company.
  • The expansion of qualifying expenditure on software and consumables to include expenditure on data licenses and cloud services, together with the extension of the scope of R&D relief to cover mathematical advances.
  • Limits to relief for R&D activity undertaken overseas. Under this proposal, if a company subcontracts some R&D activities, it will need to confirm that those activities are undertaken within the UK in order to claim relief. If it engages the services of externally provided workers, it will need to confirm that the worker is paid via a UK payroll to qualify to include the expenditure in a claim for relief.

Should you need to discuss your Research & Development Tax Credit claim, please contact our offices.