Claiming R&D Tax Credits with Confidence
R&D Tax Credits have very much been in the limelight over the last few Budgets. Rishi Sunak is clearly a huge supporter of innovation coming out of UK business and regularly cites this as being a key driving force for growth and building a strong UK economy.
The UK Treasury is particularly keen to support UK businesses to fund work that brings about new knowledge and capabilities in fields of science and technology. R&D Tax Credits are part of a package of Innovation Incentives available for this purpose.
These innovation incentives are intended to make the UK a competitive location for organisations committing resources that seek genuine and significant achievements in scientific and technological capabilities. It is these breakthroughs that underpin superior outcomes for products, processes, materials, devices or services.
Ultimately, the tangible and/or intangible outcomes of the science and technological based work, when leveraged commercially, is what drives competitive advantage!
Administrative mechanics and qualification criteria may vary from one innovation relief to another. But ultimately, Innovation Incentives are in place to subsidise a company’s innovation costs directly or indirectly – the UK Government is investing in innovation.
Despite this, there has always been a level of uncertainty around R&D Tax Credits - would a business qualify? What if a business took advantage of the scheme? Who should you work with to submit a claim?
All of these queries can be met with answers that hopefully put claimants at ease and increase the number of businesses being rewarded for their innovation.
1. Positive reform in the world of R&D Tax Credits
The current climate of the R&D Tax Credits world is a little unsettling. Despite the intentions behind the reforms being positive, and the recent changes comforting, the speed, volume and unfamiliarity of the changes being consulted on and phased in, seem to have triggered a general sentiment of malaise.
Since the shift in the conduct of HMRC to ensure that companies submitting R&D Tax Credit claims are eligible for the relief and are not over claiming, both claimants and advisers have found it confusing and disruptive.
R&D Tax Credits have been supported by the UK Government since they were introduced in 2000, but there have been changes made to the reach and scope of this relief over the last 20+ years, for example, the switch in the mechanics for giving relief for the Large Company Scheme, which changed to RDEC (R&D Expenditure Credit).
To appease claimants and advisers, HMRC regularly consults with various stakeholders around this tax relief via an HMRC sponsored forum known as the “R&D Communication Forum”. This forum facilitates discussions around interpretations, policy intent, issues experienced in practice and much more, since, of course, the UK government wants to ensure that R&D Tax Credits are fit for purpose, up-to-date and competitive.
In the Spring Budget of 2021, Government objectives for the R&D review were announced:
- To ensure that the UK remains a competitive location for cutting edge R&D;
- That the reliefs continue to be fit for purpose;
- To ensure taxpayer money is effectively targeted.
As the review was announced, HMRC launched a more in-depth and wide-reaching consultation process which ran between 3 March 2021 and 2 June 2021. The findings of this consultation were published in a Report by HM Treasury in November 2021 and are now shaping how changes are being used to set the road map for supplementary focused areas of review and consultation.
HMRC is listening and taking on board the opinions and reasoning of all stakeholders in R&D across many industry sectors. These shared understandings are key to modernise the tax legislation framework through revisions to definitions, eligibility criteria, scope and the operational mechanics or targeting of the reliefs.
In summary, R&D Tax Credits are currently undergoing an extensive review to improve the value this funding delivers to the UK economy, because, ultimately, the Government believes in the transformative effect of R&D and wishes to nurture this in the UK.
2. Targeting abuse of R&D tax relief
One aspect of reform that has been majorly unsettling for UK businesses claiming R&D Tax Credits is the repercussions of tax fraud and abuse.
The UK Treasury is concerned that the progressive impact of the R&D Tax Credits schemes is being diluted by increasing instances of fraud and abuse. This has led to a need for renewed focus on anti-abuse, which has begun to shape changes in both R&D tax legislation and HMRC policies and approaches when it comes to monitoring compliance.
How HMRC is rising to the challenge to stamp out abuse of these schemes
The government estimates that the cost of fraud and abuse within claims across both the SME and RDEC schemes could be in the region of £311m. However, the main focus of anti-abuse measures is around the SME scheme.
Steps announced so far to tackle abuse:
- A cap on the amount of the payable credit that can be claimed under the SME scheme – designed to catch artificial structures but genuine businesses can still, unfortunately, fall within the rule base, even though no wrongdoing was intended.
- Additional resource within the HMRC R&D team to review and scrutinise claims being filed (100 new R&D case workers to date).
Steps and legislations to take effect for accounting periods commencing on or after 1 April 2023:
- Formalising the need for details around important aspects of the claim (covering both the work done and the basis of expenditure collation/calculation) – making this a compulsory requirement.
- Transparency requirements – the names of advisers who have assisted a claimant company to put the claim together must be provided in the claim.
- Making digital filing of a claim mandatory.
Awareness of problems caused by unqualified/unregulated R&D advisers
There is now widespread awareness amongst individuals in business, HMRC and professional bodies including Chartered Institutes for taxation and accountancy professions, of unethical, unqualified and unregulated advisers operating in the R&D industry.
Abuse of this tax relief, fuelled by conduct among fraudulent advisers with no background or knowledge of tax is problematic. The R&D Tax Credits advisory industry in and of itself is largely unregulated. Anyone can call themselves a tax adviser, anyone can offer R&D tax advice, and anyone can prepare and submit R&D Tax Credits claims.
The R&D Tax credit schemes have, sadly, become a magnet for abuse by advisers with no tax background, seeking to make money without fully understanding the rule base or qualification criteria.
Unfortunately, many innocent and unsuspecting businesses are being caught out by the ignorance or deliberate fraudulent behaviour of people claiming to be tax advisers. Only realising when HMRC raises an enquiry that they cannot substantiate their claim.
Professional, qualified tax advisers have been aware of this issue for a while and have proactively campaigned to raise HMRC’s awareness of this problem within the R&D Tax Credit claims preparation industry.
Professional bodies have also responded to this problem, collaborating to produce Professional Conduct in Relation to Taxation (“PCRT”) guidelines for R&D tax credits. PCRT applies to members who practise in tax. It is a framework that sets out the professional standards of behaviour that all members of the PCRT bodies must adhere to. Professional tax advisers who are members of a PCRT body, such as the Chartered Institute of Taxation (“CIOT”) are regulated by their body in relation to these standards.
3. Optimistic outlook
Whilst the changes can be unsettling, R&D Tax Credits remain such an important route for funding innovation and growth. This process of reform is bringing focus and enlightenment, which is empowering for genuine advisers, like myself, working in this industry.
Qualified and knowledgeable R&D tax professionals work to ensure the purpose and intent behind tax legislation manifests fairly and compliantly amongst the organisations we assist.
I am pleased to find that an increasingly important question on the lips of heads of finance and C-suite executives is how to find an R&D adviser with both the right professional credentials and the right demeanour to work with key staff in the business to put together the claim report - good R&D advisers add a huge amount of value to the claim process and beyond!
Supporting a mindset of confidence in your R&D Tax Credits claim
The purpose of this article is to provide businesses with the awareness, knowledge, and insight to reassure and impart confidence in claiming R&D Tax Credits in the current climate of reform.
If you, like many stakeholders in business, are feeling uncertain about whether changes impact your ongoing ability to claim, what the increased risk of an enquiry means and who to trust to assist you with the process of claim compilation, hopefully this and the related articles in this series will empower you to claim R&D Tax Credits with confidence.
Working with a specialist R&D tax adviser
I’m a qualified chartered tax adviser and a member of the CIOT, with 20+ years’ experience working in tax – predominantly corporate tax.
I began my career in tax in 2001, just a year after the first scheme of relief for Small and Medium Enterprises (“SMEs”) was introduced for R&D Tax Credits. Having trained within the tax practice of a Big 4 accountancy firm, I continued to work in practice for that same employer for a further 11 years. I spent 6 of these years working in corporation tax compliance, before specialising in R&D tax relief within the same Big 4 accountancy firms’ national R&D team.
In 2012, I left my employment and set up Copper to solely focus on supporting UK businesses with the process of compiling R&D tax credit claims with 100% compliance.