By Mary Tierney BSC ARCS ACA CTA, Tax Director
On 17 July HMRC published the results of its recent project that involved the issue of a large number of random enquiries into R&D tax credit relief claims made. HMRC’s approach to Research and Development tax reliefs – GOV.UK (www.gov.uk) As a result of this, one could deduce that the answer to the question in the title is “rather hard” as HMRC have reported that surprisingly, 1 in 4 of the claims made were totally disallowed on the basis that no qualifying R&D had taken place. We have looked at the detail of the publication, and there are some interesting themes and conclusions that can be drawn.
Our view is that the published HRMC guidance is weak in a number of areas. It is a truism that asking the same question repeatedly, in the same way and expecting a difference outcome is inevitably going to fail – and this is where, in our experience, the problems in submitting a fair and robust R&D claim lie.
In theory identifying R&D is simple, the qualifying project needs to:
- have looked for an advance in a field of science or technology
- have to overcome the scientific or technological uncertainty
- try to overcome the scientific or technological uncertainty
- and show that the project could not be easily worked out by a professional in the field
In the guidance provided or when querying an R&D claim, typically these are the questions HMRC will repeat – with the guidance around what is meant by this somewhat lacking. There is some acknowledgement of this and in the recent publication, HMRC have committed to making further improvements to its guidance and will publish examples of eligible and non-eligible claims – we await these with interest.
Why you should use an R&D specialist to assist with your R&D claim
In practice this means our job when working with a company on an R&D claim is to translate what we are told by the company, which generally explains how brilliant the product is and what it does, rather than what is relevant to the R&D claim, which is how it does what it does and what the advance in the underlying field of science and technology was. Over the years this is something we have considerable experience with, and is probably why, as an advisor who works with many clients on R&D claims, we had minimal issues arising from the random enquiries.
The HMRC publication in more detail
There is no doubt that R&D tax reliefs are hugely valuable to company’s making advances in areas of science and technology. As a result many companies make claims under the two available schemes, which means it becomes expensive for the Exchequer. According to the publication of 17 July 2023 in 2015 to 2016 there were 43,665 claims , totalling £4.0 billion of tax relief and on current forecasts HMRC expects the cost of relief for claims received in 2027 to 2028 to total £9.5 billion.
As a result, HMRC became concerned about non-compliance, both innocent and fraudulent errors and as a result during 2021 a review of R&D claims was carried out which involved a mandatory random enquiry programme (MREP) for SMEs claiming under the SME scheme or RDEC to better understand levels of non-compliance. This was rather frustrating for the companies who were unlucky enough to be selected for this random enquiry and had to incur professional fees in dealing with these enquiries, resulting (based on our client experience) in minimal, if any adjustments to the tax relief claim made. Whilst based on our experience the random checks did not highlight any particular issues, it would appear that HMRC did identify some issues as based on this and they have updated their estimate of the overall level of error and fraud for 2020 to 2021 to 16.7.% (£1.13 billion) and as a result HMRC will continue to increase scrutiny of R&D claims made.
At this time HMRC also suggested that they were concerned about fraudulent claims, although they consistently refused to give any information around this citing operational reasons. According to the publication of 17 July, in July 2022, a dedicated R&D Anti-Abuse Unit was created to tackle incorrect claims and open enquiries into the most complex cases. HMRC has countered criminal attacks on the R&D system involving fraudulent or hijacked businesses; blocking £85 million in fraudulent claims, challenging more than 2,500 suspected claims; and arresting 9 people.
HMRC’s analysis of the random enquiry data is interesting:
- They reported that around half of the claims had some element of non-compliance but considered there was fraud in less than 10% of claims
- 25% of the claims were totally disallowed on the basis no qualifying R&D had taken place
- 19% of cases overclaimed the relief
- 2% of claims had technical errors
- The smaller the claim, the higher the level of non-compliance
These figures have to be viewed in light of the likelihood that in some of the random enquiries it was not commercially viable for the company to deal with the enquiry and therefore the company agreed to repay the tax benefit rather than incur the costs of dealing with the enquiry.
There are a range of measures and implications that were already expected and that have also arisen out of this research.
- Slower tax credit repayments – where the claim results in a repayable tax credit – HMRC aim to pay 85% of claims within 40 days
- A reduction in the rate of the relief and a potential restriction to the repayable amount based on the year’s PAYE liability
- A restriction to exclude overseas cost from claims
- A number of administrative features ranging from mandating the information provided to notifying HMRC in advance of new claims
For companies who are making advances in the areas of science and technology, R&D tax reliefs remain hugely valuable and should never be overlooked. Our view has always been that the narrative which sets out the qualifying projects is the most important part of the claim and this must be concise, but targeted and we will always challenge our clients to make sure that the claims are robust and reflect qualifying activity. As purse strings tighten within the Exchequer we can only expect the level of controls and scrutiny of tax reliefs to increase – however the relief is there for a reason, to encourage innovation and advances, and working with a tax accountant with a thorough knowledge of the rules and wide practical experience, such as the team at Bennett Brooks is essential.
If you have any questions about R&D, please do get in touch and one of our experts will be happy to help.