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R&D tax claims changes

With a multitude of changes being announced to research and development (R&D) tax schemes, Mark Evans of R&D Tax Claims in Shrewsbury takes a look at what this means for innovative businesses across Shropshire.

The R&D scheme was initially introduced by the Government in 2000 in a bid to support SMEs and encourage innovation, by allowing them to claim back some of their costs relating to research and development activities. A separate scheme for larger organisations, now known as RDEC, launched in 2002. The schemes essentially enable organisations of any size or sector to make tax claims for genuine R&D activities in order to receive a cash payment or ‘credit’ and/or a reduction in Corporation Tax. 

Since the initial launch, HMRC reports that more than £40bn in R&D tax relief has been repaid to UK businesses, with almost 80,000 SME claims made in 2020/21 - the latest year for which data is available. This represents an increase of 130% in just five years, over which time the UK economy has been pretty much static in terms of growth.

It’s easy to think therefore that claiming under the schemes is without risk - that HMRC will either agree or disagree with your calculations, and that you’ll either receive some money from them, or you won’t. In reality though, HMRC has the ability to open an enquiry up to a year after submission - meaning they could come calling wanting that payment back (plus potentially interest and in some cases fines).

At the very least, it’s a hassle to have to pay that money back. At worst, you’ll have already invested the funds back into your business and won’t have the amount they’re asking for to hand.

The impact of the HM Treasury report

The risk of a post-payout enquiry has considerably increased over the last year following the recruitment of more than 100 new tax inspectors hired specifically to look into R&D claims.

This was in response to increased scrutiny by HM Treasury over the level of ‘error and fraud’ which in 2020/21 (the last year for which figures are available) was estimated to account for 3.6% of the total cost of the schemes (5.5% for the SME scheme and 0.9% for the RDEC scheme).

These findings also triggered imminent changes to the way R&D claims must be pre notified and subsequently submitted to HMRC.

For accounting periods starting on or after 1st April 2023, companies who have never claimed R&D before (or not in the last 3 years) will have to pre-notify HMRC digitally of their intention to claim R&D tax relief within six months of the end of the accounting period.

In addition, from 1st August this year, companies will also be required to submit the claims digitally, this additional information includes full details of the projects and the costs involved, the named officer within the company signing off on the claim and details of any external consultant who has advised on the claim. It’s hoped this will lead to greater accountability and a reluctance to claim unless there’s an absolute certainty that the activities really do count as R&D.

It should also become much easier for HMRC to trace consultants who are ‘repeat offenders’, leading to a significant reduction in the number of unscrupulous advisers - those persuading companies to submit claims in the knowledge that they are not really eligible - leaving only those who prioritise the financial security and good name of their clients above their own income.

What will change as a result of the Autumn Statement?

Further changes were announced in the Autumn Statement last November. SMEs who are making a profit were previously able to claim tax relief on the full amount of their qualifying research and development activities, plus an additional 130%. It was announced in the Budget that this ‘enhancement rate’ will decrease to 86% for costs incurred from 1st April 2023. Although the effect of this reduction will be mitigated to some extent by the coinciding rise in corporation tax from 19% to 25%.

Loss-making SMEs will see the amount they can claim drop from 14.5% of the ‘surrenderable loss’ down to 10%. Conversely, companies who qualify for the RDEC scheme (generally those who have more than 500 employees and turnover more than €100m annually) will see themselves able to claim for 20% of their qualifying expenditure, compared to 13% currently.

Furthermore, the Chancellor, Jeremy Hunt, made it clear they are looking to merge the two current schemes (SME and RDEC) into one in the near future - and that they intend to work with SMEs to understand how more support could be given to them, without increasing the total budget spent by the Government.

It was a relief that the SME scheme wasn’t cut entirely. Of course ridding the industry of advisers who are encouraging misuse of the system is imperative – but the last thing that should be happening now is that businesses who are undertaking legitimate R&D activities are financially disadvantaged by changes to the system. Because it’s these companies which are the backbone of the UK economy in their development of new ideas, products and processes.

Then came the Spring Budget…and some good news for a change

A new credit rate of 14.5% was introduced for loss-making companies whose R&D expenditure makes up at least 40% of their total expenditure (compared to 10% for other loss-making companies). This takes effect for R&D costs incurred from 1st April 2023.

Data licences, cloud computing services and all mathematics including ‘pure maths’ now quality for tax relief.

And proposed restrictions to the amount of R&D subcontracted overseas which can be claimed under the scheme have been delayed a year until 1st April 2024.

The Chancellor also revealed draft legislation would be published in the summer, ahead of a potential merger between the SME and the RDEC schemes.

Choosing the right adviser

With the decrease in R&D incentives for SMEs and the increases in both the amount of information companies need to submit, including pre-notification, as well as the number of HMRC enquiries being launched, it’s recommended that a professional and experienced R&D expert is instructed to ensure companies apply for every penny they’re entitled to – and not a single one more.

However, as we’ve seen from the HMRC reports and increase in media around so-called ‘cowboy’ advisers, not every adviser is genuinely looking to submit a claim that stands up to scrutiny – sadly, some are simply looking to make as much money for themselves as possible through the commission they earn on claims. Companies are even being charged up to 35% in some cases!

To maximise the chance of a claim which doesn’t result in HMRC demanding their money back, asking the right questions before instructing an adviser is essential:

Mark Evans is the founder of R&D Tax Claims, which launched 11 years ago and specialises in supporting businesses from the manufacturing and engineering sectors.