Claiming tax relief for research and development is set to get harder as HMRC seeks to clamp down on the estimated £1.13bn of fraud and error in claims
From 8 August 2023, all businesses – or their R&D advisers – will have to fill in an Additional Information Form before they submit their company’s corporation tax return when submitting claims for R&D tax relief. There is a new HMRC online portal to submit claims.
The new process is designed to allow HMRC to quickly assess the validity of the claim.
Importantly, it will give the tax authority details of the R&D agent used by the business. This is to enable HMRC to assess the likely level of expertise involved in preparing the claim.
BDO warned that HMRC will use the data from this report to risk profile claims by size of claim and by business sector.
The new rules are also designed to address high levels of fraud and error in R&D claims where an estimated 17% of claims are fraudulent, HMRC reported in July. This was significantly higher than HMRC’s previously published estimate of 3.6%.
Carrie Rutland, innovation incentives partner at BDO said: ‘For the many businesses that are genuinely carrying out groundbreaking R&D, the changes being introduced may seem overly bureaucratic, particularly for large groups submitting multiple claims. However, given the high estimated levels of error and fraud associated with R&D claims, it’s no great surprise that HMRC is keen to clamp down on non-compliance.
‘Businesses involved in R&D will need to ensure they are clearly demonstrating their qualifying activities to HMRC. Failure to do so may mean they run the risk of an HMRC enquiry. The department has recently added 300 new officers to its R&D team which suggests it’s getting serious about stamping out error and fraud.’
Andrew Tall, corporate tax partner at accountancy firm HW Fisher, explained what needs to be included in the additional information form and how businesses can improve their chances of making a successful claim.
‘The additional information form requires extra measurements, thorough checks, and meticulous record keeping. Given the extra amount of information that firms will need to submit, we recommend that firms start preparing for their claim as far in advance as possible to allow themselves enough time to gather all the documents needed, and to avoid any costly, timely mistakes.’
The new requirements will be challenging for SMEs who do not usually need to provide this level of detail.
Stephanie Hurst, director at Monahans, said: ‘Many smaller enterprises who prepare their own R&D claims may not currently submit the level of information required by the additional information form, so these businesses are likely to be significantly impacted by the introduction of the new requirements.
‘It isn’t always cost effective for very small businesses to engage with an R&D adviser and quite often they will be preparing and submitting their own claims. Whilst they can continue to do this, we expect smaller businesses to be heavily impacted by the new requirements and the level of detail that will need to accompany their claims.’
What needs to be included in the additional information form?
Each additional information form will need to be signed by a named senior officer of the claimant company and must contain detailed information on the R&D project – including the name of the agent who has advised the company on compiling the claim.
The form must also include a breakdown of the costs across categories, the number of R&D projects carried out and describe some or all of the projects depending on the number of projects being submitted.
• for 1-3 projects, companies need to describe all the projects that are being submitted to the claim.
• for 4-10 projects, they need to describe sufficient projects to cover 50% or more of the qualifying expenditure with a minimum of three projects described.
• for more than 10 projects, they need to describe sufficient projects to cover 50% or more of the qualifying expenditure with a minimum of three projects described. If this would require details of more than 10 projects, then only 10 need be described.
Plan to merge separate R&D reliefs
The latest requirements are a prelude to further reforms to the UK R&D regime. Last month, the government unveiled draft legislation which proposes to merge the two current schemes – the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.
The aim of the single R&D relief scheme is to achieve tax simplification, including having a single set of qualifying rules as well as control the overall cost to the Exchequer.
Rutland added: ‘Further reforms to merge the two current schemes into one from April 2024 may be the right approach, but there is a danger of going ‘too far too fast’. This could create more uncertainty and result in the UK becoming less attractive to inward investors.’
HMRC has halted the payment of research and development (R&D) tax credits while it investigates irregularities in claims for the relief
HMRC contacted accountancy firms on Monday informing them of the decision to pause the payment of research and development tax credits as it investigates what it refers to as ‘irregular claims’ for the tax credit payments.
In a message to firms, HMRC stated that the move may cause delays to its processing times for other R&D tax credit claims, the tax authority said this will ‘ensure they prevent abuse of the relief’.
The tax authority stated that the majority of R&D tax credit claims are ‘genuine and will not be affected’.
HMRC has also requested that claimants do not contact the R&D helpline/mailbox to chase their claims. Instead, it has asked agents and companies to review their online account for updates on the status of claims.
HMRC confirmed that it will continue to issue the regular Monday agent email to update claimants on the processing times but ‘hopes to share more information’ with agents next week.
In order to process payments more quickly, HMRC has asked people to ‘ensure’ that they have completed all entries on the R&D section of the corporation tax return (CT600 form) adding that ‘submitting additional information to support any claim, such as an R&D report, will also help HMRC to process claims quicker’.
The tax authority also issued the reminder that if a claim that is incorrect, inflated, or fraudulent is submitted then a penalty could be issued.
A HMRC spokesperson said: ‘We have paused some research & development tax credit (RDTC) payments while we investigate some irregular claims.
‘The majority of R&D relief claims are unaffected but there will be some delays to our usual processing times. This is to ensure we prevent abuse of the relief.’
In December, accountancy firm Azets issued a warning to SMEs about rogue R&D advisers who were targeting small businesses and making inappropriate claims.
The firm’s analysis of HMRC’s most recent annual report found that the monetary value of fraudulent R&D claims in 2021 was £303m, which was up from £271m in the previous year.
The firm stated that it expected HMRC to tighten its controls on the relief after the Chancellor announced reforms of the R&D tax credits announced in the Autumn Budget 2021 which are to come into effect in April 2023.
The announced reforms aimed to support modern research methods by expanding qualifying expenditure to include data and cloud costs, refocus support towards innovation in the UK and a raft of measures to target abuse and improve compliance.
Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
You may be able to claim Corporation Tax relief if your project meets our definition of R&D.
Tax Credits Explained
In order to encourage Research and Development the UK Government introduced R&D Tax Credits in 2000.
This has proved highly popular with 86,000 UK companies claiming back almost £7.4bn in tax relief in 2020. R&D Tax Credits are a very niche part of the UK tax code that could bring your company thousands of pounds in tax relief.
- A government incentive aimed at advancing science and technology within UK companies
- Launched in the year 2000
- Rewards innovation, risk taking, and research and development
- You can backdate your claim up to two financial years.
Who is eligible?
Companies of all sizes can claim R&D Tax Credits.
The size of your business will determine which R&D Tax Credits scheme you are eligible for and ultimately what proportion of your spend you can claim back, but every business registered in the UK is eligible.
Eligible R&D activities:
- Overcoming technical challenges
- Creating and testing prototypes
- Streamlining processes
- Trialling new or substituting materials
- Developing bespoke software
- Trial and error
- Industry firsts
What can be claimed back?
R&D Tax Credits are calculated based on enhancing expenditure for research and development work, as the UK Government aims to reward innovation for SMEs and large companies.
- Staff wages and other related costs
- Payments made to sub-contractors and external workers
- The cost of materials consumed
- Software licensing costs
- Payments to clinical volunteers
- Light, heat, power and other utility costs.