The Government is reforming R&D tax relief, and is consulting on proposed changes. In the third and final instalment of a series of blogs, Catax looks at HMRC’s proposals for advance notification of R&D claims following similar deep dives into data licence exemptions and overseas expenditure.
One of the most problematic measures to come out of the consultation is a proposal that companies must notify HMRC in advance of making an R&D claim, believed to be an “in period” notification.
This would have huge implications for the claims process and pose real harm to SMEs who are claiming for the first time.
This is because, in our experience, many businesses fail to claim due to lack of awareness and have been performing R&D for some time. These companies would lose out on significant sums if they were not able to claim for previous accounting periods once they’d realised they qualified for the relief.
This proposal is all part of HMRC’s efforts to clamp down on abuse of R&D tax reliefs but, in Catax’s view, there are better ways to go about it.
Poor claims can still be made, even where HMRC is notified about them in advance.
It also creates a strange misalignment in the tax filing process — companies can amend their corporation tax return within 12 months of their filing date to take account of, for example, Research and Development Allowances and Patent Box, but would no longer be able to adjust it for R&D relief, even though it is interlinked with these other reliefs.
Who it impacts
Advanced notice of claims particularly impacts SMEs and start-ups. These companies are often the most reliant on the relief but also the least likely to be aware of its existence.
It would also hurt companies who are yet to appoint an accountant or adviser, and those failed by poor advice once they had.
Ultimately, this measure punishes genuine claimants who have concentrated on building their businesses but haven’t been aware of the scheme or received the right advice.
The bigger picture
R&D tax reliefs only exist because the Government wants to encourage and reward innovation for the benefit of the economy.
Our own post-claim surveys with clients show how reinvesting in R&D and into the business more generally are the top uses of R&D tax benefits. Ultimately, this reinvestment feeds into higher Treasury revenues in the form of VAT, PAYE and Corporation Tax — all benefiting the country as a whole.
Yet many companies will not have met with us until after their accounting period has ended. If these proposed measures come into effect, we will see many businesses missing out and never reinvesting to grow their business.
The UK would also be unusual in implementing such a measure. There is no such notification period in Ireland, Canada, France, Germany, Japan and the USA. In Australia, companies have up to 10 months after the end of the accounting period to notify the tax authorities of their intention to claim, while it is seven months in Portugal.
We support steps to tackle abuse of the relief but recommend that HMRC, in its efforts to tackle abuses of the R&D tax relief system, focus on rogue advisers rather than the companies themselves.
Secondly, the R&D tax relief industry should be regulated with its own set of standards.
These measures would help to prevent inaccurate and fraudulent claims while not penalising qualifying companies who didn’t know about the scheme until after their accounting period.