R&D Tax Relief - Are you Compliant?

In the UK, R&D is defined in section 1138 of the Corporation Tax Act 2010 as “activities that fall to be treated as research and development in accordance with generally accepted accounting practice.” This is subject to regulations made by HM Treasury on the definition of R&D, which refer to the detailed guidelines published by the Secretary of State for Business, Energy and Industrial Strategy (BEIS). The BEIS guidelines define R&D for the purpose of obtaining relief as follows:

“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D.

Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.” Innovation is at the heart of the UK’s strategy to boost productivity and economic growth. It offers new opportunities to increase the competitiveness of UK firms and create transformative technologies which help us to address societal challenges ranging from climate change to better health outcomes.

Looking ahead, the government is determined to build on this success with an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs have a key role in incentivising this investment by reducing the costs of innovation. It is therefore essential to ensure that the reliefs remain up-to-date, competitive and well-targeted.

The disparity and sheer increase in SME claims bring into light the need to reform the current R&D tax relief scheme and it appears the HMRC are on the cusp of beginning this reform. Deploying larger resource into the regulation of R&D claims and ensuring compliance throughout.

The R&D tax reliefs are currently administered by HMRC as part of the core corporation tax (CT) system. This means they are claimed in the CT return, with limited information provided to HMRC.

This has the advantage of being easy for companies to claim and take full advantage of the reliefs. However, companies are still required to keep records to support all claims, including R&D claims, and HMRC can request these records if enquiring into a claim. This may take place several months after the claim is received, and even longer after the R&D was carried out.

Where an enquiry challenges whether or not relief was properly claimed, companies may be concerned by the potential impact on their continuing R&D, and so many companies such as R&D Tax Services already provide additional information to HMRC voluntarily which greatly helps HMRC to focus compliance activity. Ensuring that erroneous claims are removed prior to submission ensuring not only a fully compliant claim but a fully supported one should the HMRC enquire.

Given there is a degree of uncertainty facing firms making claims for expenditure already incurred, and as R&D is a relatively specialist part of the CT system, some companies find it helpful to engage a specialist agent such as R&D Tax Services Ltd to advise on or help prepare the claim.

However, there has been a systematic increase of smaller agents offering a no-win, no-fee business model which presents a risk of boundary-pushing, especially considering that the majority have been formed within the last 12/24 months and have no history of supporting claims through a HMRC enquiry. In fact, it has been found that over 70% of smaller agents do not have either the requisite expertise in defending a claim or the insurances in place to protect their clients.

It is therefore important that any company looking to engage an agent should perform their due diligence and look not at the “win rate of claims” but at the defended and support activity surrounding review. Considering that submissions are currently unaudited and the HMRC is bringing in significant additional resource to review all claims submitted within the last 3 financial years we expect to see a surge in review and rejected claims from those who have pushed the boundaries or the R&D definition.

These instances of potentially fraudulent or incorrect claims may have increased within the last 12 months with a 16% increase against the SME claims or the year ending March 2020. This equates to 7.4bn in total support claimed, up 19% from the previous year (6.3bn) to note of the 85,900 claims made, 85 percent were less than £100,000 in value – conceivably an indication of “spurious or erroneous claims”.

In the past, various initiatives have sought to provide greater certainty. These have included increases to the specialist R&D teams in HMRC, improved guidance, advance assurances for smaller companies making a first claim, and an aim of processing claims to the SME payable credit within 28 days of receipt. While some of these changes have been well received, others do not seem to have made a great deal of difference, or have had other, unintended effects

The 28-day aim gives very little time for HMRC to consider every case in detail, with the result that processing payments becomes a priority, potentially at the cost of other work and meaning that a company’s claim is enquired into and amended after any payable tax credit element has been paid. Therefore, companies are finding themselves in potentially hazardous scenarios wherein their claims have been paid and monies reinvested prior to rejection and

There have been growing concerns over the past few years that this system does not provide adequate controls over the allocation of the increasingly large sums of tax reliefs being given for R&D. Tax advisers have also expressed their concerns. The government has recently acted to control some types of potential abuse by re-imposing a cap on the amount of payable credit that can be claimed under the SME relief.

It is therefore important to align with reputable agencies such as R&D Tax Services whom sole aim is to provide independent advice and support for companies wishing to claim R&D Tax Relief. Our company ethos is built around integrity and transparency and our industry experts are on hand to support your business through even the most technical of claims.

If you have already claimed R&D or are looking to review your previous or current claims, we offer a free health check to ensure not only you are fully compliant but have also maximised on your claims for both this financial year and last.

R&D Tax Services Limited is part of the BC&A Chartered Accounting group and have been established for over 17 years offering independent financial and tax advice to clients across Hampshire and the UK.