The last two years have been turbulent ones in the world of Research & Development tax relief. HMRC’s increased scrutiny of claims continues, so that we are seeing more enquiries into claims than we had over the previous five years, and there have been a series of negative reports in the press. Combined with a reduced rate of relief for SME claimants, does this mean that R&D tax relief has had its day?
The answer, you will be relieved to hear, is a resounding “no.” It is true that claimants need to be diligent in identifying their eligible R&D projects, and care must be taken to ensure that only qualifying costs are claimed. However, the message from the 2023 Budget is that the Government still sees R&D tax relief as a vital tool in strengthening the UK economy, by supporting innovative companies. Genuine claimants should still take advantage of the relief available. On the other hand, overdue steps are being taken to counter fraudulent abuse of the R&D tax reliefs.
Combating R&D claim fraud
Specifically, two new compliance requirements have been introduced with that intention. Firstly, 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 the less scrupulous providers of R&D claim support.
Secondly, all claims submitted after 31 July 2023 must be registered with HMRC using a new online reporting tool. This requires the company, or its advisor to disclose details of the projects undertaken, why they are considered to be qualifying R&D and an analysis of the costs on a project-by-project basis. The disclosure must name the individual in the company with responsibility for the claim and also any professional advisors used. If a claim is submitted without first filing the online notification, it will not be processed. While this may sound onerous, the level of detail should be similar to that which most companies include in their R&D reports already. It should also ensure that HMRC has sufficient details to review claims and so reduce the number of post-submission enquiries once the system has bedded in.
Other changes
In a welcome move, the proposed restriction on companies’ ability to claim for the costs of subcontractors and other workers outside the UK has been deferred until 1 April 2024. This should allow HMRC to provide more guidance on how the new rules are expected to operate in practice, in particular around the complex question of how to apply the exemption for R&D that cannot practically be undertaken in the UK.
Looking further ahead, the days of a two-tier approach to R&D tax relief are numbered. HM Treasury has consulted on combining our two current schemes into a single scheme based on the R&D Expenditure Credit rules. The intention is to simplify the process for claimants, with the aim of increasing the scheme’s impact on the economy. It is to be hoped that the changes, which could be introduced as soon as 1 April 2024, remove some of the complexities that currently trip up companies carrying out R&D as part of customer contracts. However, details of the new single scheme are yet to be released so it is too soon to say whether it will benefit all claimants. This may be a period of change for R&D tax relief, and it has never been more important to use trusted and experienced professional advisors. However, that should not stop companies from making claims where they meet the requirements.
