Date
20 Sep 2023Category
R&D Tax CreditsCompanies in the UK risk falling foul of a new regulation involving the submission of tax relief claims for research and development (R&D), it has emerged. Nearly half have already had their claims declared invalid by HMRC since the new documentation requirement came into effect from 8 August.
This is the first real sign of the bite from some of the previously announced compliance changes to R&D tax relief claims. R&D tax reliefs for R&D spending from the beginning of April 2023 have reduced, and many innovative SMEs preparing year-end accounts for financial periods which run beyond that date will now begin to feel the impacts from the reductions.
We also know from HMRC that nearly half of claims submitted since 8 August, when the new mandatory additional digital information forms were introduced, have been completed incorrectly.
Companies that have not complied with the new forms will soon begin receiving letters from HMRC saying their R&D claim is invalid unless they amend their returns. This may be do-able for some but for those who have left it to the last minute, it could mean their claim is lost.
It is not known how many companies have had their claims rejected between 8 August and 3 September. Although, we would estimate that it could be thousands, given that there were 89,300 R&D claims in the UK for the tax year 2020-21.
The new administrative regulations are designed to weed out erroneous and fraudulent R&D claims.
As part of its campaign to identify malpractice, HMRC stated that from August businesses submitting R&D tax relief claims needed to provide much more information than previously. The additional information required includes:
HMRC investigations into R&D tax relief error and fraud have significantly increased, particularly over the last couple of years, to combat a boom in unregulated R&D tax consultancies and with the additional financial burden of R&D tax credits falling upon the Treasury since Brexit implementation.
The overall level of error and fraud for both R&D tax relief schemes (SME and R&D expenditure credit) across all sectors of the economy was estimated to be £1.13bn for 2020-21. That is equivalent to 16.7% of claims, significantly higher than HMRC's previously published estimate of 3.6%.
Latest available figures from the Office for National Statistics show that expenditure on R&D that was performed in the UK in current prices was £61.8 billion in 2020, an increase of £2.1 billion since 2019.
As noted on our recent insight piece, the Government has proposed further changes to the R&D tax relief regime. These changes are on the back of HMRC’s malpractice campaign and also the consultation that took place earlier this year.
In summary, the proposals focus on the following:
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 and has been facing substantial change in recent months, making it increasingly difficult to navigate.
If you require assistance with an R&D claim or would like to discuss any challenges you’re experiencing with the new submission requirements, please get in touch with a member of our specialist team or your usual Azets advisor.
