Research & Development (R&D) tax relief claims – a new era?

The Government long recognized that a “competitive R&D credit scheme” was an important factor in its goal for the UK to be a world leader in science and technology.

For 2018/19, the most recent figures show that over PSD5.3bn R&D tax relief support has been claimed for that year alone. This was based on 50,000 claims. more than PS28bn in tax relief have been claimed across all R&D programs. HMRC estimates that each PS1 in R&D credit stimulates between PS0.75 and PS1.28 additional R&D spending by Small & Medium-sized Enterprises (SMEs) and between PS2.40 to PS2.70 additional R&D spend for large companies.

It’s a clear stimulus. There are growing concerns that R&D tax reliefs could be misused and erroneous. According to the National Audit Office , fraud and error amounts to more than PS300m per year . This led the NAO* to approve HMRC’s latest audit*.

These concerns have been addressed by HMRC in three major steps:

• To review R&D claims, has added 100 additional staff . PwC knows that they are currently in post and reviewing R&D claims.
• Accelerated plans for a random enquiry program’ to provide R&D reliefs. This is in part to better understand levels of error or deliberate overclaims.
• A maximum limit on SME scheme cash claims was reintroduced at 1 April 2021. This will limit cash credits to an SME at PS20,000 and 300% of certain companies’ total PAYE or NICs liabilities. This could have a significant impact on SMEs who share R&D resources within their corporate groups and/or outsource to others. It is most likely to affect biotech companies.

What does all this mean?

A new era is approaching for R&D tax claims. This will be characterized by increased scrutiny by HMRC of R&D claims through more inquiries, more challenges to R&D claim on technical and factual grounds and a renewed focus on the quality of evidence to support the claim. This will likely have an impact on many claims, even those that were made on a similar basis as in the past.

The supporting evidence is a critical area. It is the claimant’s responsibility to prove their entitlement to tax relief and the amount they are entitled to. Clear eligibility assessments and documentation should be provided for all claims. This documentation must demonstrate the technological advancement in question by measuring it against the technical baseline. Documentation should be focused on the technical foundation rather than its functional requirements. Remember that R&D claims can be used to prove the claimant is entitled to relief in the claimed amount.

A clear strategy should be used to support the claim’s preparation, and submission. Consider carefully how you identify and gather relevant data. Also, how you present your claim to HMRC and how they interact with you – all from the start of any inquiry or correspondence.

Be aware of the risks

HMRC may impose potentially severe financial penalties on claimants who cannot provide reasonable evidence for their claim, even if the supporting evidence is incorrect or incomplete. HMRC may charge penalties if a claim is modified as a result to an HMRC challenge. The amount of the penalty and the basis for it will depend on whether the adjust is justified, prompted or unprompted by HMRC, as well as any mitigation that the claimant may have.

If corporates fail to have adequate procedures to prevent deliberate overclaims, severe penalties may be imposed under the Corporate Criminal Offences (CCO) regulations. If the claimant is a large business, they may be subject to additional scrutiny and even censure by the Senior Accounting Officer (SAO), which requires strong governance.

An enquiry into a claim may have other implications. HMRC may also investigate tax issues that are related to a claim, such as IR35 applicable to external workers. HMRC might also be interested in transfer pricing. This is not just for intra-group R&D activities, but also consider the larger question of identifying the value of the R&D activity. It also includes possible future and current revenues. This topic will likely be the subject of more HMRC inquiries in the future.