R&D Tax relief: More change on the horizon

Companies are currently getting to grips with significant changes in how they file their research and development tax relief claims, but there could be even more seismic changes on the horizon for 2024.

Filing measures to combat R&D claim fraud

HMRC has recently published an analysis indicating that approximately 25% of all R&D tax relief claimed is overstated, either because of errors in the claim or as a result of fraud. We have already witnessed increased levels of HMRC enquiries into claims in an attempt to reduce losses to the Treasury. In addition, in the current year, two new compliance requirements have been introduced to aid this process. 

From 8 August 2023, any company filing an R&D claim in its corporation tax return, must first submit an online Additional Information Form (AIF) to HMRC. Any claim received by HMRC where no AIF has been filed will not be processed, meaning that HMRC will remove it from the corporation tax return. Communication from HMRC has indicated that in the first month from 8 August, approximately 50% of all claims submitted have been rejected because no AIF had been filed.

The AIF requires a company or its adviser to disclose details of the projects undertaken, why they are considered to be qualifying R&D and an analysis of costs on a project-by-project basis. The disclosure must also name the individual at the company with overall responsibility for the claim and any professional advisers involved. The intention of the AIF is to allow HMRC to improve risk management of claims, so that they can focus enquiry activity on claims that appear more likely to be overstated, either mistakenly or as a result of fraud.

In addition, for accounting periods beginning on or after 1 April 2023, companies intending to claim R&D tax relief for the first time (or who have not claimed in the previous three years) must notify HMRC of their intention to claim within six months of the end of their accounting period. If the notification deadline is missed, no claim will be permitted, so it will be vital for these companies to consider their eligibility much sooner than was previously the case. The Government’s hope is that this will rein in the activities of less scrupulous providers of R&D claim support.

More changes are on the way

In 2023 there was a welcome deferral of the introduction of the restriction on companies’ ability to claim for the costs of subcontractors and other workers outside the UK. However, this measure has only been postponed; it will be introduced from 1 April 2024. Its impact will be to reduce the claims of companies that outsource R&D to non-UK resident providers unless there are qualifying reasons why the R&D cannot practically be undertaken in the UK. It should be noted that this will be a tightly applied test, based on geographical, cultural, or regulatory factors; economic reasons, or staff availability will not be acceptable reasons for using non-UK providers.

Even more significantly, the familiar two-tier approach to R&D tax relief may be coming to an end, with a further announcement on this expected in the Autumn Statement. If this reform goes ahead, the two size-based schemes will be merged into a single system, based on the R&D Expenditure Credit rules, with an anticipated implementation date of 1 April 2024. It is hoped that these changes should reduce areas of confusion, for example where businesses are carrying out R&D as part of customer contracts, but it would also 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 of qualifying R&D costs, in line with the Government’s policy of continuing to support innovative companies. The next few months will continue to see significant change for R&D tax relief and having the support of a trusted advisor remains vital. Nevertheless, for companies that are conducting eligible R&D, these remain valuable incentives that should be claimed where possible.