New requirements leading to invalid R&D tax relief claims – Cathrin Richards of Azets Gloucester
Companies in the UK risk falling foul of a new regulation involving the submission of tax relief claims for research and development (R&D), it has emerged.
Nearly half have already had their claims declared invalid by HMRC since the new documentation requirement came into effect from August 8.
This is the first real sign of the bite from some of the previously announced compliance changes to R&D tax relief claims. R&D tax reliefs for R&D spending from the beginning of April 2023 have reduced, and many innovative SMEs preparing year-end accounts for financial periods which run beyond that date will now begin to feel the impacts from the reductions.
We also know from HMRC that nearly half of claims submitted since August 8, when the new mandatory additional digital information forms were introduced, have been completed incorrectly.
Companies that have not complied with the new forms will soon begin receiving letters from HMRC saying their R&D claim is invalid unless they amend their returns. This may be do-able for some but for those who have left it to the last minute, it could mean their claim is lost.
It is not known how many companies have had their claims rejected between August 8 and September 30, although, we would estimate that it could be thousands, given that there were 89,300 R&D claims in the UK for the tax year 2020-21.
Why were the additional submission requirements brought in?
The new administrative regulations are designed to weed out erroneous and fraudulent R&D claims.
As part of its campaign to identify malpractice, HMRC stated that from August, businesses submitting R&D tax relief claims needed to provide much more information than previously. The additional information required includes:
• Each claim to be endorsed by a named senior officer of the business.
• Any agent who has advised on compiling the claim must be named.
• Costs to be broken down across qualifying categories, with a detailed description of the R&D work also needed.
HMRC investigations into R&D tax relief error and fraud have significantly increased, particularly over the last couple of years, to combat a boom in unregulated R&D tax consultancies and with the additional financial burden of R&D tax credits falling upon the Treasury since Brexit implementation.
The overall level of error and fraud for both R&D tax relief schemes (SME and R&D expenditure credit) across all sectors of the economy was estimated to be £1.13bn for 2020-21. That is equivalent to 16.7% of claims, significantly higher than HMRC's previously published estimate of 3.6%.
Latest available figures from HMRC show that qualifying expenditure on R&D that was performed by UK companies was £44.1 billion for the tax year 2021-22, an increase of £3.3 billion since 2020-21.
Additional R&D tax credit scheme changes
As noted on our recent insight piece, the Government has proposed further changes to the R&D tax relief regime. These changes are on the back of HMRC's malpractice campaign and also the consultation that took place earlier this year.
In summary, the proposals focus on the following areas:
A unifying of the two separate schemes - A significant part of the Government's consultation earlier this year was on the introduction of a single system of relief, which is expected to align largely with the current RDEC (large company) scheme, with two notable potential exceptions, as mentioned below.
Subcontractor expenditure - It is proposed that large companies would be able to claim for qualifying payments to subcontractors (in the manner currently available to claimants under the SME scheme). This could be beneficial to some claimants within the RDEC scheme and make it more generous by expanding the scope of qualifying expenditure.
PAYE cap - The more generous SME cap on the benefit available to companies has been proposed rather than the more limiting definition currently adopted by the RDEC scheme, meaning that some companies will have access to higher relief.
If you have any questions or need further information about R&D tax relief claims, please contact your usual Azets advisor.
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