The R&D tax credit scheme is being scrutinised like never before and Parliamentarians this week called on the expertise of Catax’s own Director of Tax, Nigel Holmes, to find out what’s going right — and wrong — with this valuable incentive.
The Government is reforming the R&D tax relief legislation, as well as increasing the number of HMRC compliance checks following a surge in fraudulent submissions.
The Treasury is thought to have lost an estimated £469million to fraud and error in the last year alone.
Catax was one of the two leading UK tax relief specialists invited to take part in a House of Lords Finance Bill Sub-Committee convened on Monday (Nov 14) to dig a little deeper into the main issues causing concern over the legislation and enforcement of the rules.
The main area of focus was abuse of the scheme and Nigel told the committee that HMRC enforcement practices needed to be improved in order to clamp down on false claims but avoid putting off genuine claimants.
His remarks come after a new compliance unit with HMRC recently began issuing challenge letters to claimants that didn’t identify problems with their claims, but asked questions that made it clear enforcement officers hadn’t read the reports that justified them.
Nigel explained: “It has to be more focused, and the skill set of HMRC officers needs to be increased so they understand the definition and the rules a lot more, and focus their attention on where they believe the problem in false claims lies, rather than [using] a scattergun approach.
“My concern is they will turn off genuine claimants who are doing good R&D.”
One concern raised by the committee was the possibility of the tax credit scheme costing the Treasury increasing amounts of money as more companies become aware of it.
Nigel said: “We often survey our clients as to what they do when they get their R&D tax credits and they all answer [that they] either reinvest in R&D, reinvest in working capital or spend it on capital expenditure, or take on more staff. They all hope it will grow their business and add something to the UK economy.
“We can’t lose sight of the good that the R&D tax credit system can do to benefit the UK economy.”
The reforms published in the draft bill aim to refocus reliefs towards the UK by removing the ability to claim for overseas R&D costs and extend qualifying expenditures to include the costs of datasets and cloud computing.
In an effort to tackle abuse, changes are also being made to the way claims are made. From April 2023, all claims will need to be accompanied by a detailed report outlining R&D activities and how they mirror HMRC legislation. Advisers will have to put their name to the report, and all claims must be signed off by a senior executive at the claimant company.
There is also a new requirement for companies to inform HMRC in advance that they intend to make a claim.