Enquiries on R&D tax relief claims have increased. But how has the Autumn Statement changed R&D policy? Here’s the latest.
Could the turmoil created by HMRC’s numerous, and sometimes unjustified, enquiries mean the days of R&D tax relief are numbered? Or will the policy changes outlined in the Autumn Statement simplify the R&D tax landscape? We consider the growing toll on businesses claiming R&D tax relief and the far-reaching consequences this could have on the UK economy.
Administrative red tape
In our April issue, we discussed the significant changes to the absolute tax benefit of the SME and RDEC schemes.
HMRC has subsequently increased the administrative burden of submitting a successful R&D claim. This additional challenge risks businesses being caught unawares and perhaps being denied a legitimate claim.
For accounting periods beginning on or after 1 April 2023, companies must submit a claim notification form to HMRC. This is required before you make the claim if it’s your first R&D claim, or if your earlier claim was made more than three years before the end of the claim notification period.
What’s more, all claims must be made digitally, and endorsed by a senior company officer together with details of any agent advising on the claim.
From 8 August 2023, your company must also send an additional information form to support the claim before submitting the Corporation Tax return. This should include details of the qualifying expenditure, an in-depth narrative of R&D project(s) carried out and how they meet the qualifying criteria for R&D tax relief. Without this form, HMRC will deny the claim.
Proposed single scheme: the implications
The Chancellor confirmed in the Autumn Statement that the existing Research and Development Expenditure (RDEC) and SME schemes will be merged for accounting periods beginning on or after 1 April 2024. The Government says the merger of the schemes “will be a significant tax simplification”.
Currently, under the RDEC scheme, the notional tax rate applied is 25%. But under the single scheme, the notional rate applied to loss-making companies will be lowered from 25% to 19%, enabling loss-making companies to receive more cash benefit upfront. With the single scheme the proposed eligibility of subcontracted expenditure is extended to include work subcontracted to all third parties. But we must still review the detail, and see how this is operated in practice.
Although the headline is that there will be a single merged scheme for accounting periods beginning on or after 1 April 2024, the current SME scheme will continue to operate for so-called ‘R&D intensive companies’. The threshold at which a company is considered ‘R&D intensive’ has reduced from 40% to 30%, for periods beginning on or after 1 April 2024, measured by its qualifying R&D expenditure as a percentage of its total expenditure. This will bring more companies into scope. A grace period has also been introduced so that should a company fall below the 30% threshold for accounting periods beginning on or after 1 April 2024, they will continue to be eligible for the enhanced relief for one year.
From 1 April 2024, R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments. This means claimants will have greater oversight of claims and will receive payment more quickly, because the tax relief will be paid directly to the claimant company.
Finally, the Government is now concluding its review of R&D tax reliefs. We note that further action may be needed to reduce the unacceptably high levels of non-compliance. HMRC will be publishing a compliance action plan in due course. It will also continue working with industry to develop better support for R&D intensive SMEs, and consider further simplifications to the scheme.
It seems the plan is still to exclude overseas expenditure from claims in the future. This has been under discussion for some time.
Enquiries: the possible consequences
HMRC has identified high levels of fraud and abuse in the R&D tax credit scheme. For this reason, it increasingly appears to take a ‘guilty until proven innocent’ line, leading to great uncertainty for claims and considerable frustration in the profession. There are also suggestions that HMRC is not following enquiry protocol, indicating a lack of experience and R&D training in its team.
There is a risk that this current treatment of R&D enquiries, on top of the already complex claim rules, could push R&D investment outside the UK. In turn, jobs could also exit the UK, resulting in long-term negative impacts on the UK economy.
What should you do now?
The R&D world may be weighed down by HMRC’s numerous enquiries, but this should not stop legitimate R&D claimants from seeking relief. More than ever, it’s important to have diligent R&D tax advisors guiding you through the process.