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Small innovative businesses across the UK are strongly advised to take extra precautions when selecting advisors to assist with R&D tax reliefs as HMRC continues to crack down on fraudulent and error-strewn claims.
Go straight to the sections you’re interested in or read on for the full guide.
- What is R&D tax relief?
- HMRC’s crackdown
- The growing impact of these changes
- What should innovative small businesses do?
What is R&D tax relief?
R&D tax credits have been one of HMRC’s most generous business incentives for many years. Despite recent reductions to the amount you can claim, they remain an attractive tax incentive. They reward companies that innovate and attempt to advance knowledge and capability in their field of science or technology.
A new merged RDEC (Research & Development Expenditure Credit) tax relief scheme will replace the SME scheme on April 1, 2024. It will apply to accounting periods beginning on or after April 1, 2024. The merged scheme will adopt the existing RDEC rate of 20 per cent, which provides net corporation tax relief of 15 per cent against qualifying R&D expenditure (£15 for every £100 spent)
For R&D-intensive SMEs, where 40 per cent of their total company expenditure is spent on qualifying R&D costs, provided they are loss-making before any R&D tax relief, are still able to claim R&D enhanced tax relief at 86 per cent and surrender losses at 14.5 per cent (maximum of £26.97 for every £100 spent).
Assisting with these claims is big business for R&D tax boutiques and accountants; however, significant issues have arisen in recent years.
Check Eligibility TodayHMRC’s crackdown
The number of R&D claims submitted to HMRC has grown exponentially in the last four to five years, with 90,315 submitted in 2021/22. Many were deemed to be error-strewn and, in some cases, fraudulent.
In 2021 to 2022 cost of the scheme was £7.6bn, an 11 per cent increase from the previous year and given recent economic challenges, particularly post-Covid, HMRC was looking to target specific areas and R&D tax has become one of their main compliance targets to tackle.
Levels of error and fraud reached unacceptable levels for the Treasury within the R&D Tax Relief schemes after figures revealed in 2020/21 it was 16.7 per cent, costing £1.13bn and up from the previous estimated level of 3.6 per cent. Without intervention, this would only have grown.
This intervention took the shape of nearly 300 new HMRC staff deployed to focus on R&D tax compliance and new policy measures to counter non-compliance. A dedicated R&D Anti-Abuse Unit was also set up in July 2022 to tackle complex claims.
The latest figures show that one in five R&D tax claims is being challenged by HMRC, and many of these are being refused because HMRC officers perform a simple internet search and, if they find anything similar, make representations that the technology already exists.
This is even the case where a company holds patents on the technology. It leads to protracted and costly efforts for companies and their advisors defending the claim, whilst some are even giving up despite having genuine claims.
The growing impact of these changes
In July 2023, HMRC issued a report on its approach to R&D tax reliefs and introduced mandatory reporting requirements effective from August 8, 2023, requiring the ‘Additional Information Form (AIF)’ to be submitted digitally to HMRC before the tax return was submitted. If the AIF is not submitted, claims are automatically rejected.
Many small businesses do not realise that accountability for the R&D tax relief claim sits with them, not their accountant or R&D tax advisor who submitted it. Most accountants adhere to strict professional conduct standards, but as R&D tax relief boutiques are not regulated, very few will adhere to any professional charter.
It was just a matter of time before the growing challenges of R&D tax claimed casualties. In March 2024, a major provider of R&D tax relief solutions ceased trading. They claimed to have secured over £200m in R&D tax incentives for their clients, boasted a 100 per cent success rate for claims, and represented over 3,000 clients.
Following the closure, many of these client businesses find themselves in limbo, unsure whether their claims will be processed and paid out or if not submitted, having to find an alternative advisor. Worse still, the closure of their advisory firm means they may be left to manage their conversation with HMRC by themselves.
What should innovative small businesses do?
Despite the recent controversies and negative press surrounding the schemes, small business owners who conduct qualifying R&D should not be put off claiming the relief they are entitled to.
Small businesses should ensure their claims are maximised while remaining robust and compliant. To do this, it is wise to stay up to date with the latest rules – even if you are not submitting the claim yourself, being aware of the latest legislation can help make the process much easier.
There are strict guidelines for what qualifies as R&D for tax purposes and understanding these will help you assess much more accurately whether your project qualifies.
You can find the latest rules here
Another smart move is to maintain detailed documentation on the project, including:
- Project plans
- Technical specs
- Prototype drawings/photos
- Details of any technical uncertainties encountered
If your accountant does not provide an R&D tax service, you should do due diligence when appointing an R&D tax specialist advisor and check that they have a strong track record. This means ensuring they have the right professional qualifications, conduct claims to a high standard, and provide enquiry support should HMRC enquire into the claim.
Darryl Hoy is the technical director of the Research & Development tax reliefs tax team at Shorts Chartered Accountants.
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