Could you have a problem with a past claim for Research & Development (‘R&D’) tax reliefs?

Earlier this year, HMRC announced that they had hired an additional 100 R&D compliance officers with the intention to look at R&D tax relief claims much more closely, with more enquiries being raised and consequent delays in making repayments.

In the past, the government’s flagship industrial policy to encourage innovation and investment through R&D tax relief claims, tended to have pretty light touch scrutiny. However, throughout 2022, the effectiveness of the relief has been questioned with Chancellor Jeremy Hunt announcing a series of changes to the UK research and development (R&D) tax credit regime during the recent Autumn Statement.

The changes announced by Jeremy Hunt included a cut to the SME enhanced deduction (reducing from 130% to 86%) and credit rates (reducing from 14.5% to 10%). These changes were justified as being driven by a need to address issues of fraud, encouraged largely by the attractive benefits of the regime.

Taking into account the increase in the rate of Corporation tax to 25% from April 2023, the overall cash impact of the proposed changes on profitable companies will be to reduce the R&D tax credit benefit from 24.7 pence to 21.5 pence in the pound and increase the RDEC benefit from 10.5 pence to 15 pence in the pound.

Overall, the main reason for all the attention is that the relief doesn’t seem to have provided value for money across the board. In the UK R&D expenditure is estimated to be only 4 times the value of total relief provided, against the OECD average of 15 times.

So, did the legislation need changing or did it just need policing more tightly? 

Even as a result of the proposed changes (from 1 April 2023), HMRC will continue to look much more closely at claims in order to provide value for money across the board. This will lead to a very different approach to dealing with claims and greater investigation into past claims which may already have been paid out.  The Fraud Investigation Service also seems to be actively involved in this, evidenced by the recent arrests mentioned above.  In a case of deliberate fraud, nobody is likely to mind that.  If, however, an assumption is being made without evidence that incorrect claims involve fraud, then that would be very worrying.  Even if fraud isn’t involved, and a claim has been made where the taxpayer was poorly advised and had absolutely no intention of making an incorrect claim, penalties can still be up to 100%. 

Where does that leave the taxpayer?

The takeaways from this are first that it is even more important that your R&D claims are accurately prepared and can stand up to HMRC scrutiny. Second it prompts the question ‘How comfortable are you that your past claims could withstand the same scrutiny?’.

Both of the above questions will become increasingly important as HMRC plan to introduce the SME changes outlined above, along with the following measures in terms of R&D claim submissions for accounting periods beginning on or after 1 April 2023:

1. Claims must be submitted to HMRC digitally;
2. Detailed reports must accompany all submissions, including disclosures around the categories of qualifying expenditure and details of the R&D activities undertaken;
3. Claims must be endorsed by a named senior company officer;
4. Companies must notify HMRC, within six months following the end of the accounting period to which the claim relates, of their intention to make an R&D claim;
5. Details must be provided of any advisor / agent that has advised the company in making the claim.

There is no doubt the above measures are being introduced to provide HMRC with more upfront information, allowing them to scrutinise claims in a more targeted way, and raising more enquiries (if necessary), prior to approving those valid and robust claims.

How can we support you?

Our specialist Innovations Incentives team continue to prepare R&D claims following their thorough process, backed up by detailed analysis, which is recognised and appreciated by HMRC. Additional internal checks continue to be performed before any claim is submitted, focusing on the areas where we know HMRC have been raising enquiries and challenging claims. From our experience, this approach is the most appropriate.  This approach ensures all our claims submitted are more robust, evidenced by the negligible number of enquires raised into our claims nationally each year.   

As a result, whether you:

• Are considering making an R&D claim for the first time and are unsure whether you qualify;
• Have historically made a number of R&D claims but would like to ensure your claims are robust / have been optimised;
• Would like to assess the impact of the upcoming changes from 1 April 2023 on your R&D filing position, or;
• Have recently had a letter from HMRC questioning your R&D claim;

Get in touch

 If you have any questions for our team regarding a R&D or tax related matter, you can contact us via the enquiry form below.

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