Here’s a guest blog by Hethel Innovation sponsor, Ensors Chartered Accountants, sharing their expert tips on R&D tax relief changes.
The current world of R&D tax relief
Over the last two years, we have seen many developments emerge in the world of Research & Development (R&D) tax relief, resulting in a turbulent time for businesses who are trying to keep up with the latest guidance. Furthermore, we are continuing to see increased scrutiny of claims by HMRC, with more enquiries into claims than were experienced in the previous five-year period. Combined with a reduced rate of relief available for SME claimants, and the recent negative press about the exploitation of the relief by bad actors, there have been concerns that R&D tax relief could have had its day.
Whilst it is true that companies claiming tax relief need to be diligent when identifying if their projects are eligible, the message from the Government is that it is continuing to provide incentives for innovative companies, and it considers R&D to be a vital tool in strengthening the UK economy. As a result, genuine claimants should continue to take advantage of the relief available to them but must ensure that they only claim for qualifying projects. This is because HMRC alert to abuse of the regime and has put in additional steps to counter fraudulent abuse of the R&D tax reliefs.
What is being done to prevent R&D fraud?
Two new compliance requirements have been introduced with the intention of reducing the number of fraudulent R&D claims. Companies who plan to claim R&D tax relief for the first time (or three years after their last claim) in the accounting periods beginning on or after 1 April 2023, must notify HMRC that they intend to make a claim within six months of the end of the accounting period for which the claim will be made. If this notification is not submitted before the deadline, they will lose the opportunity to claim for that period. Therefore, if a company plans to claim R&D tax relief, it is important that it identifies its eligible projects on a real time basis. It is the Government’s hope that this will reduce potentially fraudulent activities by providers of R&D claim support.
The second requirement is that from 8 August 2023 companies submitting claims must file an online Additional Information Form (AIF) with HMRC before they submit their claim. If a company submits its claim before the AIF has been filed, HMRC will not process the claim. The AIF requires details of the projects for which the company is claiming and why they qualify as R&D, together with an analysis of the projects’ costs. In addition, the AIF names the individual at the company with responsibility for the claim and any professional advisors it has used. While this may appear demanding at first glance, it should be noted that many companies will have previously provided a similar level of detail in their R&D reports. The AIF has been designed to aid HMRC in identifying potentially overstated claims, so we should see a more focused enquiry regime.
Other changes on the horizon
The planned restriction on the ability for a company to claim the costs of externally provided workers and subcontractors based outside the UK has been postponed until 1 April 2024. This will provide HMRC with more time to draft additional guidance on how the new rules will work in practice, particularly around the exemption for R&D that cannot practicably be undertaken in the UK.
Even more significantly, the current approach to R&D tax relief may be coming to an end, with a further announcement on this expected before the end of the year. If it goes ahead, the two size-based schemes will be merged into a single scheme, based on the R&D Expenditure Credit rules, with an expected implementation date of 1 April 2024. It is expected that these changes will reduce areas of confusion, for example where businesses are carrying out R&D as part of customer contracts, but it will mean a reduction in the level of relief for many SMES. However, R&D intensive SMEs would instead be able to claim a more generous R&D tax credit, based on the current SME scheme. Simply put, this will be available to companies where more than 40% of their (or their group’s) expenditure comprises qualifying R&D costs, in line with the Government’s policy of continuing to support innovative companies.
The next few months could continue to see significant change for R&D tax relief and having the support of a trusted financial advisor remains vital. Nevertheless, for companies that are conducting eligible R&D, these remain valuable incentives that should be claimed where possible.