WHAT’S HAPPENING WITH RESEARCH AND DEVELOPMENT TAX RELIEF?

Darren Griffin Tax Director

The past 18 months have seen significant changes to research and development (R&D) tax relief, driven by HMRC’s focus on reducing levels of fraud and abuse in the system. Key changes include an extension to certain qualifying expenditure, amendments to the guidelines defining R&D for tax purposes to include advances in pure mathematics, a focus on UK innovation for accounting periods beginning on or after 1 April 2024, and other minor changes.

Furthermore, for qualifying expenditure incurred from 1 April 2023, the rates of R&D tax relief have changed. SMEs face a reduction in their level of benefit but companies claiming under the R&D Expenditure Credit (RDEC) will benefit from increased rates of relief.

This article will focus on the current HMRC landscape, the approach to tackling abuse, and the future of R&D tax relief.

HMRC landscape and tackling abuse

HMRC has increased its scrutiny of R&D claims due to its estimate that fraud or error exists in almost 17% of claims. This totals £1.13bn, of which £1.04bn relates to the SME scheme. This has led to unprecedented levels of enquiries as HMRC seeks to tackle the issue.

There are broadly two types of enquiry. Those led by its Wealthy and Midsized Business Compliance unit have a caseworker assigned, generally resulting in a more manageable process and an earlier conclusion. However, enquiries led by the Individual and Small Business Compliance unit take a ‘volume compliance’ approach, which is proving more difficult to navigate and has been particularly criticised by many, including the Chartered Institute of Taxation. darren.griffin@rsmuk.com

Whilst over time we hope to see a drop in HMRC activity back towards normal levels, other specific changes will enable HMRC to further target its efforts on poor quality claims.

In addition to the ANF, all companies are now required to complete an Additional Information Form (AIF) for claims submitted on or after 8 August 2023. Both forms will require greater levels of detail to be provided to HMRC. In addition, claimants must also split qualifying expenditure by project which then drives the number of projects for which technical details need to be provided within the form, which will generally be a minimum of three projects but no more than ten.

The future is still bright!

For accounting periods beginning on or after 1 April 2023, companies must submit an Advanced Notification Form (ANF) no later than six months after the end of the accounting period, where a company has either never previously claimed or not done so in the three previous accounting periods.

The above changes are mainly aimed at reducing fraudulent claims and maintaining necessary standards by claimants and advisers. However, R&D tax claims are still a generous relief and play an important role in encouraging companies to innovate and seek advances in science or technology. More change is coming, in the form of a proposed merged regime, but R&D tax relief is certainly here to stay for the foreseeable future.