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With research and development support changing from 1 April 2023, what is HMRC looking for in research and development tax claims now? Lindsey Copland has the latest insight.
Contents
The recent biannual R&D Communication Forum (RDCF) has shed further light for companies seeking to take advantage of R&D tax incentives. The HMRC-sponsored RDCF is particularly valuable now in light of the unprecedented changes that the R&D tax regime is going through.
Here's a summary of some of the key takeaways.
Submit R&D tax claims as soon as you can
The delayed turnaround on claims for R&D tax relief for small and medium-sized enterprises looks set to continue for now.
Abuse of the SME R&D tax relief scheme led to a pause in payment processing in May 2022 while additional checks were implemented to prevent the release of payments to fraudulent claimants. The aim to make payments within 28 days for SME claimants rose to 40 days as a result. While payment processing has since resumed, and the backlog of claims cleared, the extra checks remain in place.
Additional resources are being deployed, but HMRC's focus remains on protecting the integrity of the SME R&D tax relief scheme and so its SME claim turnaround ambition remains at 40 calendar days for 80% of claims.
You should therefore file your claims as soon as possible for more timely processing.
Significant changes ahead for R&D support
There was a recap on the measures announced in the Autumn Statement 2022 and on ‘L Day’ (legislation day) in July.
From 1 April 2023, there will be significant reductions in support available under the SME scheme. The additional deduction available to SMEs will reduce from 130% to 86% and the payable tax credit will reduce from 14.5% to 10%. This is due to the need to ensure investment in R&D support is effective, to tackle fraud and to make cost savings.
Support available under the R&D expenditure credit (RDEC) scheme is to increase from 13% to 20%. This is so that it remains competitive internationally and to continue driving the higher levels of additionality (the amount of additional private sector R&D investment per £1 of government support) achieved by the RDEC scheme.
The government emphasised its continued support for R&D, reiterating its pledge to provide £20 billion of R&D support by 2024/2025.
HMRC mentioned the consultation on a single RDEC-like scheme and means to mitigate the impact of the reduced support for SMEs but there are no further details on these as yet.
The amount of R&D support claimed in the 2021 fiscal year was £6.6 billion, made up from £4.4 billion SME and £2.2 billion RDEC. Although the amount of support decreased by 4% compared to the previous year, which is likely due to the impact of the pandemic on R&D activity, the volume of claims increased by 7% year on year (80,000 SME and 10,000 RDEC). Of the 10,000 RDEC claims, 6,000 were made by SMEs and 4,000 by large companies.
As anticipated, a relatively small number of RDEC claims accounts for a high proportion of the support claimed, while there's a large amount of quite small SME claims.
A government study was undertaken which largely reconciled the difference in the estimated value of R&D activity between the statistics prepared by HMRC and the Office for National Statistics. It was found that the ONS’ statistics don't fully reflect the amount of R&D done by SMEs and consider a much smaller pool of companies.
Before making a claim...
The Q&A session at the RDCF yielded a few additional considerations if you're considering making an R&D tax claim.
Publication in a scientific journal of work that is the subject of an R&D tax claim is useful supporting evidence that R&D took place
Overseas expenditure restrictions shouldn't impact the consideration of overseas branch employees of UK claimant companies under the staffing costs category of R&D expenditure
Incurrence of R&D expenditure before and after 1 April 2023 – your R&D expenditure should be correctly allocated to pre- and post-rate change time periods; be robust in your apportionment methods and keep supporting evidence
Eligibility of expenditure on company subcontractors is being considered in the context of the planned single RDEC-like scheme
R&D subsidisation rules haven't changed since Brexit – you should have regard to the EU-UK Trade and Cooperation Agreement and the Northern Ireland Protocol where necessary
Moving forward
This RDCF provided a useful recap of the fundamental R&D regime changes that lie just ahead, as well as some useful clarifications. We recommend that you submit any outstanding claims as soon as possible and ensure you have a good understanding of the upcoming legislative changes.
Compliance activity is likely to increase so you also need to ensure your claim substantiation documents and supporting records are in order.
We'll be continuing to engage with HMRC in the next consultation process and to represent the interests of claimant companies.
To find out more about R&D tax claims, please get in touch with Lindsey Copland.
