The research and development (R&D) tax credits scheme has been a hot topic in recent months. Recently planned changes have led to the scheme being criticised for confusing claimants. Furthermore, the HMRC’s increased scrutiny of claims continues to cause controversy, especially as the results of the closer examination of claims are starting to come through. As a result, there has been a consultation for the proposal of a single R&D scheme to simplify processes for claimants.
August 2023 changes: increased scrutiny for the R&D tax credits scheme
The planned changes for the R&D tax credits scheme were due to go into effect by 1 August 2023, however, they were pushed back to 8 August 2023. The August changes emphasise that more care and due diligence are needed when submitting claims and that all future claims will need sufficient supporting evidence. When discussing the changes, HMRC explained: “These regulations deliver on the Government’s commitment to tackle high levels of error and fraud within the R&D tax regimes by improving the standard of information that companies are required to provide upfront in support of their claims, and by requiring the information in a form that can allow for improved risk assessment. These requirements will have effect from 08 August 2023.”
However, these changes have been challenged by the Chartered Institute of Taxation as it has expressed concerns that HMRC’s efforts to quell bogus R&D tax relief submissions could result in legitimate small and medium-sized enterprise (SME) claims being rejected, with the increased bureaucracy leading to ‘a breakdown of goodwill and trust between HMRC and taxpayers and their agents’.
HMRC has assured companies that alterations to the scheme will be addressed by clear guidance of the changes, and communication through HMRC’s stakeholder forum: The Research & Development Communications Forum.
Supporting innovation for economic growth
The R&D tax credits scheme is still an incredibly important tax relief for innovative companies, and so genuine claimants should not be deterred by the current scrutiny as HMRC is only focused on fraudulent and inaccurate claims.
The UK Government continues to support UK R&D, and the April 2023 changes included the expenditure for cloud computing and pure mathematics, both of which now qualify.
Another change was that loss-making SMEs that meet the R&D intensive threshold can claim R&D tax credits using the 14.5% credit rate for qualifying expenditure on or after 1 April 2023. Those that don’t meet the threshold (or if your SME is profitable) can claim with the new 10% credit rate.
Emphasising continued support for the scheme, HMRC said: “The Government recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society.”
New practices for tax advisers
Specialists providing advice on R&D claims for their clients will be aware that from August 2023, all submissions are required to include the names of any tax advisers used to compile the claim. Furthermore, technical supporting documentation is no longer optional and needs to be signed off by the company as a testament to its accuracy.
Amongst R&D advisers it has always been best practice to provide robust technical reporting to substantiate a claim as it helps HMRC to understand the projects that have been undertaken, this will also help in the event of an enquiry. With the increase in HMRC enquiries it is important that advisers are willing to support clients with any queries and it is recommended that companies should ensure this is clearly stipulated in the agreement with their adviser. If businesses are concerned about compliance or feel that their claim would not withstand an HMRC enquiry, they should review their R&D claim process and seek advice from a trusted R&D tax adviser.
Future RDEC scheme merger changes expected
Further changes, adjustments and updates to the R&D scheme are anticipated, as plans are in motion to create a ‘research and development expenditure credit (RDEC) like scheme’ for all as currently the RDEC scheme only services large companies. These changes could potentially see improvements to the levels of relief given to SMEs, and on 18 July 2023, the UK Government shared its proposal for a ‘Research and Development reform – Consultation on a single scheme’ which is desired for April 2024.
When discussing this proposal, HMRC said: “The Government has not yet taken a decision on whether to merge schemes but intends to keep open the option of doing so from April 2024. This would present significant opportunities for tax simplification, including having a single set of qualifying rules, being able to remove the exceptions for subcontracting to certain types of entity, known as ‘qualifying bodies’.”
Review tax credits scheme claims to ensure they meet new guidance
The R&D scheme is going through drastic changes, and this is expected to continue until the Government and HMRC are satisfied that the level of misuse of the scheme has been drastically reduced.
Companies should not take the scheme for granted and assume that if they have claimed previously and have received a tax credit or corporation tax reduction, their claims have been ‘accepted’ by HMRC as historic claims can and will be put under the microscope if HMRC decides to open an enquiry.
HMRC does not fully review every claim but does appear to be assessing more submissions than before and is finding many that are not acceptable. As a result, it is more important than ever that companies fully understand the contents of their R&D tax claim and agree that it is a true reflection of their work.