The effectiveness of the R&D tax relief schemes has long been a focus for the treasury and HMRC. The 2021 Spring Budget announced a review of the schemes to ensure that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted. Given the generosity of the SME scheme (up to 33 pence in every £1 of qualifying expenditure can be returned in benefit), ensuring its fit for purpose and that the UK remains a globally-competitive location for cutting-edge research and development are key priorities for genuine claimants, R&D advisors and HMRC alike.
Material changes to the scheme have been announced for implementation as part of the Finance Bill 2022-23, and the Autumn Budget announced intentions to target abuse and improve compliance – seeking to address concerns from the National Audit Office regarding an estimated £311 million of losses due to error and fraud concerning the schemes in the 2019-20 HMRC Annual Report and Accounts.
Fast forward to June 2022, and HMRC has announced compliance checks enhancements to prevent abuse of R&D tax credit payments. These additional checks have increased HMRC’s standard processing times from 28 to 40 days, and no doubt contribute to the increase in enquiries being opened. These recent changes and ongoing efforts at HMRC to tackle abuse (such as the addition of 100 new compliance caseworkers during the height of the pandemic) have resulted in increased numbers of enquiries being opened, reported by multiple professional bodies, advisers and tax-specific sector publications.
If claimants haven’t already, now is the time to ensure they are taking reasonable precautions in preparing accurate claims for enquiries.
Some hot enquiry topics for HMRC currently include:
1. Subcontracted and Subsidised R&D – the commercial terms between claimants and their clients can potentially significantly reduce the tax benefit or make a project ineligible to be claimed against. If your client conducts R&D to provide products/services to their clients or is contracted to do R&D, their agreements with those clients should be assessed when claiming.
2. Paid/expensed condition – expenditure with third parties must be paid at the time of claiming and expensed in accounts; expenses accrued in stock lines (or equivalent) will not qualify for relief in that period.
3. Project qualification – ensure that their claim is based on discrete projects which qualify as R&D for tax relief, per the BEIS guidelines, coupled with their respective expenditure.
Make sure your clients are prepared:
1. They use an adviser who is intimately familiar with the legislation and application of the qualification guidelines to your industry sector – ensuring projects and expenditure are robustly qualified, maximised and detailed in a high-quality report.
2. They are familiar and equipped to defend a submission if it goes to enquiry or beyond. HMRC have a complex but well-documented enquiry process which can be challenging to navigate, time-consuming to reach a conclusion and can compromise the outcome of the enquiry if not followed correctly by the caseworker.
3. They meet the deadlines set by HMRC – more recently, they have demonstrated to be quicker to issue sch.36 notices which can punish missing deadlines by issuance of penalties, and where letters have been issued by the Fraud Investigation Service (FIS) at HMRC. Extensions to deadlines are rarely granted.
It’s not possible to entirely eliminate the risk of enquiry. Whilst many factors can increase the risk of a claim being selected, a certain number are selected that appear to be low risk, and this does not necessarily suggest that HMRC believes the claim is inaccurate.
The best action a claimant can take is to use an expert who can ensure best practices are followed in the compilation of claims and is best placed to defend the claim if an enquiry is opened.
If you have a client that’s thinking of making a claim, get in touch to see how we can help.