The changes to R&D tax relief legislation looming in April will have a big impact on tax advisers and accountants, as well as the companies they support in making claims.
However, not all of the changes are set in stone yet.
The House of Lords’ Economic Affairs Finance Bill Sub-Committee has reviewed the draft legislation and sought the opinions of advisers involved in helping businesses claim the relief, including Catax, a Ryan company.
While many of the upcoming reforms are supposed to reduce abuse and fraud in the scheme, the committee believes not all the changes will work as intended.
The committee has published some recommendations which, if adopted by the government, would be a positive step in improving the legislation and how HMRC operates when it comes to R&D.
While it remains to be seen whether the government and HMRC will take the suggestions on board, Nigel Holmes, Director of Tax at Catax, a Ryan company, shares the areas to watch out for over the coming months.
For accounting periods starting on or after 1 April 2023, first-time R&D claimants and any companies that have not made an R&D tax relief claim in any of the previous three calendar years will need to notify HMRC in advance of their intention to submit a claim.
They will need to fill in a Claim Notification form within six months from the end of the accounting period for which the claim is to be made.
Catax, a Ryan company, told the House of Lords committee that this requirement punishes potential claimants who have not received timely enough advice about the need to pre-warn HMRC about their intention to claim. Ultimately, this could have a big knock-on effect as R&D tax relief support could be critical to help that company positively contribute to the UK economy.
The House of Lords committee agreed. It called the requirement for pre-notification “uniquely onerous”, without any precedent within the tax system. It said that it risks companies not being able to make legitimate claims, while it has “questionable” benefits for countering abuse of the relief.
It recommends that this requirement is dropped from the Finance Bill 2022–23 before it is introduced into Parliament — a change we would support.
Advisers that help businesses with their R&D tax relief submissions have this year seen an increase in enquiries from HMRC.
A number of criticisms were raised about their approach to compliance. We told the committee that HMRC was taking a ‘scattergun’ approach to opening enquiries, while also taking an ‘unreasonable’ amount of time to respond. We said there is a risk that this approach will turn off genuine claimants who are doing good R&D.
The committee was concerned to hear that HMRC was perceived as adopting a “confrontational approach” to R&D claimants. It agreed that this could lead to companies giving up on future claims. It was also concerned that HMRC staff did not have sufficient knowledge on what qualifies as R&D, and recommended it explore how it might improve scientific expertise within the department.
New requirements under the upcoming legislation will all involve a bigger workload for advisers and accountants, but also more work for HMRC.
The changes, which are scheduled to come into effect in April 2023, will mean:
The committee noted how the new legislation “may put greater pressure on resources if HMRC is to use the additional information it will generate effectively”. The government currently believes that it is resourced appropriately, but the committee wants this kept under review.
It also recommends that HMRC review its training programme for its R&D teams to ensure it is providing officers with the skills and knowledge they need to work effectively and appropriately with businesses on the relief.
The committee made other recommendations that HMRC and the Department for Business, Energy and Industrial Strategy (BEIS) may consider.
It recommends that the guidelines explaining the meaning of R&D are updated, as the document has not been revised since 2010 – a length of time the committee said was “not appropriate”.
It also suggests that the government should incorporate some real-world examples of eligible R&D activity, particularly in the digital and technology sectors, alongside its definition of R&D. The aim is to provide greater clarity to businesses about what they can and cannot claim for.
The committee said this was particularly important for SMEs. It recommended that HMRC and BEIS work together on a new awareness scheme for SMEs on what constitutes as R&D under the legislation.
Unless we hear otherwise, planned reforms for April will go ahead as intended — including the prior-notification requirements.
But it will be interesting to see whether HMRC and the government heed any of the committee’s advice, particularly as removing the prior-notification requirement will reduce the risk that eligible companies miss out on the relief.
Meanwhile, the government is still running a consultation into reforming the R&D tax relief scheme by creating one single, simplified R&D tax scheme to be used by large businesses and SMEs.
Catax, a Ryan company, will be providing a formal response, while also discussing proposals at the HMRC-sponsored Research and Development Communication Forum, on which we have a seat.