This article first appeared in Taxation.
There has been a lot of negativity around R&D tax relief ever since HMRC began its crackdown on fraud and error — and it is having a chilling effect.
It was vital that HMRC improved the robustness of the scheme, as it is estimated that the level of fraud for R&D tax relief reached £469 million from 2021 to 2022.
Fraud doesn’t just harm tax-payers either, as innovating companies are only properly rewarded if tax credits go to those truly breaking new ground. If companies who don’t deserve the relief are receiving significant sums, it erodes the financial advantage that should only belong to those making genuine claims.
However, the approach taken by HMRC since it began its clampdown has at times been heavy-handed, with accusatory letters sent to many companies apparently at random, with questions asked about matters addressed in the initial claim report.
Their enquiry process is not following their own guidance in CIRD80520 where it clearly states “An open-minded approach should be adopted as to whether a project, or part of a project, is relevant R&D. It is important to gather all of the facts, and listen to the company’s representations before making a decision.”
We have seen HMRC reach knee-jerk decisions after just one round of correspondence, going straight to a closure notice which effectively leaves the taxpayer with ADR or tribunal as the only, very expensive, routes to make further representations to defend their claim. Even the House of Lords, in their paper on R&D tax relief published on 31 January 2023 described HMRC as confrontational in their approach to claimants (para 179). We have even seen a case where HMRC has made a pre decision without even sending the Dropbox link we requested which, in our opinion, offered the evidence to prove the claim.
Some legitimate potential claimants – including those with very strong R&D projects – are worried about claiming as a result of the commentary around fraud and error. At the same time, HMRC is not doing enough to promote the value of such a relief and reassure those companies.
In this climate, accountants are also getting nervous about dealing with R&D. This comes at a time when they are experiencing a minor revolution in working practices for claims, as HMRC is putting evidence and accountability at the leading edge of their compliance efforts.
Changes coming into effect soon will mean:
The latter applies for accounting periods beginning on or after 1 April 2023 and the remainder are to be delivered via a new electronic “additional information” form for all claims made from 1 August 2023.
These changes will put a lot of pressure on accountants and will demand a lot more of their time.
One of the most arduous of the incoming measures is the prior-notification requirements.
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 years (looking back from the deadline to notify) 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.
Despite the fact that we’re soon going to be submitting such notifications, we still don’t yet know if a new form would be required if changes occur before the claim is submitted. For example, a change in the named senior officer or a change to the period of account dates.
The form also asks for details of an ‘agent involved in the R&D claim’. Yet in instances where an accountant works with a specialist to write the report, it is not clear who is supposed to be named.
There’s no doubt that taking on these claims, especially from larger companies with bigger projects, is going to be a lot more labour intensive. And it’s not surprising that there are accountants wondering if it is worth the hassle.
Yet for the companies themselves, all these new regulations and requirements do not make R&D tax relief less worthwhile pursuing. It is still a generous relief, especially for larger companies, and the benefit is often used to invest in more R&D.
This means that receiving R&D tax relief is still going to play a big part in many companies’ growth strategies, and they will be looking to work with advisers that are happy to assist them with these claims alongside their other tax needs.
Legitimate tax relief consultancies have a head-start on dealing with these changes because they have always been producing extensive reports that supply all the background to a claim in detail and explain how the qualifying costs interact with the legislation. Working with such specialists may help accountants deal with the extra time implications that come with the requirement to submit more detailed reports.
However, specialists and accountants alike will need to have more — and earlier — conversations with companies that may claim for R&D tax relief in the future, to ensure they are ahead of the prior-notification requirements.
And it’s worth noting that even once accountants feel like they are on top of all this new legislation, there are more changes coming down the pipeline. The Government wants to combine the SME and RDEC schemes into a single programme for all companies regardless of size. In the long-run this should make the system simpler, but it will be yet another big adjustment.
But while R&D tax relief remains so beneficial for companies, it is imperative that accountants don’t give up on assisting and advising with claims.
These upcoming changes are going to be hard, but it is ultimately going to be for the better if it cuts down on fraudulent claims. If you have doubts, work with a specialist. They know the legislation inside and out, and can ensure everything is submitted correctly.
If you’d like to discuss any of the changes to R&D tax relief with one of our specialists, please call 0300 303 1903 or email enquiries@catax.com.