R&D Relief
DWF previously reported in April 2024 on the then new and singly merged R&D scheme which had come into force for most businesses: (Link to article available here: The Ongoing Impact Of HMRC's New Approach To R&D claims | DWF Group). R&D relief seeks to stimulate innovation by allowing eligible companies to claim tax relief for R&D expenditure either by way of a reduction to corporation tax that would otherwise be due or, in certain circumstances, via a cash payment.
The purpose of the relief is to enable companies to more readily invest in R&D. Whilst this sounds ideal in theory, DWF, along with many practitioners, have had some long-standing criticisms as to how well equipped HMRC is to manage the relief applications appropriately. The R&D consultation titled "Research and Development tax relief advance clearances" begs the question: will these issues be resolved?
The Consultation
The R&D consultation seeks to gather views on R&D relief, in particular on whether to expand the use of advance assurances with the aim of reducing the now well-publicised fraudulent claims.
Advance assurance is designed to give businesses the chance to ask HMRC if their R&D tax relief claim will be successful prior to them claiming the relief. Whilst the option to do this already exists for some, it is currently restricted to many and is not frequently taken advantage of. In its current form, the scheme is only available to small and medium-sized enterprises ("SMEs") who are claiming R&D tax relief for the first time and have a turnover below £2 million and less than 50 employees. This presently limited scope looks to be counter-productive to the Governments objectives, hence this consultation.
The UK Government is looking to find ways to reduce error and fraud as well as increase certainty for those looking to rely on R&D relief. The consultation asks for input on the stage when advance assurance should be sought during the R&D process and importantly, whether to make advance assurance mandatory for certain organisations. As it stands, the current advance assurance process is a voluntary service for those who are eligible to seek it. Beyond the mandatory advance assurance proposal, the consultation also explores whether to expand the voluntary assurance currently available to any and all company types. It also explores whether a minimum spend should exist for R&D relief claims in general.
Whilst it is yet unclear what changes may result from the consultation one thing is looking likely: the fundamentals of the claims process are going to change.
For Better or for Worse?
A mandatory advance assurance process for certain companies would naturally result in an uptake of the regime. Requiring businesses and HMRC to liaise ahead of claims being made would provide more time and care for the process which should reduce the administrative burden on HMRC when it comes to the R&D relief claims actually being made. A mandatory advance assurance process would also reduce deliberate non-compliance. However, placing an obligation on parties to take advantage of an advance assurance for all its benefits also creates increased administrative burden on business. Also, businesses that are not used to seeking advance assurance may unintentionally overlook to do so even when mandatory.
The same can be said for any timeframes and deadlines the UK Government may introduce for advance assurance. Creating a window within which advance assurance must be sought may well streamline the compliance process for HMRC but strict timescales creates opportunities for deadlines to be missed. Again, creating more scope for error, frustration, potential delays on the HMRC side of things and insecurity for businesses seeking to claim relief.
Presuming the UK Government did introduce a minimum spend for claiming R&D relief, this may indeed be an effective way of avoiding the fraud and error prevalent within smaller claims. That said, the consequence is that this will limit the availability of the regime and reduce uptake. Preventing businesses from making smaller claims for the relief may well have detrimental effect on smaller businesses themselves that often rely the most on this relief in order to succeed.
Missing a trick?
When DWF reported on this topic last year we highlighted an underlying issue causing complications with R&D tax relief. Whilst the relief itself is complicated, the staff at HMRC were underequipped and under-trained to properly deal with the claims. HMRC’s “volume compliance” approach, introduced to attempt to tackle the increase in fraudulent R&D claims, means that many genuine claimants are finding it extremely challenging to resolve HMRC’s enquiries into their R&D relief claims. Whilst the consultation does look to recognise some changes that might be needed to reduce the administrative burden, it seems to be overlooking the extent of this burden and the lack of resource at HMRC's end. Making moves to streamline the process might assist in some respects, but many of the proposals seem likely to add further administration for HMRC. These attempts to simplify the process for businesses may only further complicate it for HMRC.
Nevertheless, only once the consultation concludes may we start to see any actioned change to the R&D relief claim process, for better or worse. What is certain, is that businesses undertaking R&D should give extra consideration to ensuring that their claims are well supported with evidence of genuine R&D and that they use reputable, experience advisers to submit these claims.
How DWF can help
If you are a business relying on R&D tax relief and have concerns about how any changes may affect you, please do not hesitate to contact Caroline Colliston, Zita Dempsey or your usual DWF contact.
