Date
19 Jul 2023Category
R&D Tax CreditsThe Research and Development (R&D) tax relief regime has been much-debated over the past several months, with administrative changes, reform, reductions and malpractice all playing a part. Based on Government announcements this week, there doesn’t appear to be any slowing down on this front.
Tim Croft, National Head of R&D, summarises all the latest news concerning R&D below.
It is certainly not a surprise that the Government’s R&D regime has come under fire of late for persistent claim delays and questionable management of them by HMRC caseworkers. Recent changes to the relief haven’t done much to change public perception, with benefit reductions taking effect for SMEs from April 2023.
Also, as part of their campaign to identify malpractice, HMRC will be asking for much more information alongside claims from 8 August. These changes, which place an additional burden on businesses, are explored further here.
On 17 July HMRC published a report on its approach to R&D tax reliefs and much of it is focused on the Mandatory Random Enquiry Programme (MREP). However, while HMRC states they better understand the size and scope of non-compliance in the reliefs, their opinion is based on evidence gathered before the regime changes of April this year.
Interestingly, the MREP findings were primarily focused on the SME scheme. A random sample of 500 claims received by small and medium-sized businesses from 2020 to 2021 were analysed, while a separate methodology was used to estimate levels of error or fraud in the large corporate (RDEC) scheme.
It could be speculated that the focus of the analysis on SMEs rather than large businesses is a means of developing a data-driven basis for the removal of the SME scheme.
The updated estimate of the overall level of error and fraud for both schemes for 2020 to 2021 is 16.7.% (£1.13 billion), which is significantly higher than the previously published estimate of 3.6% (£336 million).
The Government’s crackdown on abuse is certainly warranted and these figures showcase that. However, the identification of possible fraud needs to be managed carefully so as not to impact legitimate claims.
The Chartered Institute of Taxation (CIOT) recently sent two letters to HMRC expressing their concern about the issues surrounding the R&D system. The issues were acknowledged by HMRC in the aftermath of the first letter, but ongoing unhappiness among CIOT members triggered a second one. Through these communications, the CIOT raised the following concerns:
The Government published a report on 18 July showcasing proposed legislation on R&D tax relief regime reform. The proposed changes of note are:
A unifying of the two separate schemes - A significant part of the Government’s consultation earlier this year was on the introduction of a single system of relief. It is set to be the case and the RDEC route will be the main basis.
Subcontractor expenditure – As per the SME scheme rules, large companies are to be able to claim for qualifying payments to subcontractors. This could be beneficial to some claimants within the RDEC scheme and make it more generous by expanding the scope of qualifying expenditure. However, this would prevent subcontractors from making a claim, as well as those whose R&D is subsidised.
PAYE cap – The more generous SME cap proposed universally, meaning large corporates will have access to higher relief. The PAYE/NIC liabilities relevant are for all employees of the company, they do not have to be engaged in R&D activity. There are, however, some rare exemptions.
The UK’s R&D tax relief regime is constantly evolving, so if you have any questions in relation to the current requirements or would like to explore claim eligibility, please get in touch with a member of our specialist team or your usual Azets advisor.
Information correct at time of publishing, but may be subject to change in future. This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek professional advice before taking or refraining from taking action on the basis of the contents of this article.
