R&D tax relief – changes from 8 August and update

Introduction

The R&D landscape continues to look challenging and changeable as we enter the second half of 2023. The only certainty within R&D tax credits at this current time is the constant change and the shifting sands upon which the rules are based. For everyone working in R&D and claiming R&D credits, care and diligence is needed more than ever before a claim is submitted.

Important Procedural Changes from August 2023

From 8 August all R&D claims made (irrespective of the accounting period to which the claim relates) will need to be supported by a prior information return, submitted to HMRC via the online government gateway. If the company fails to file the information return prior to the corporate tax return with the R&D claim in it, the claim will be rejected.

Having undertaken several dummy runs in relation to the submission, a two project R&D claim involved the completion of thirty screens to enable submission of the form. Undoubtedly, the completion of the form will increase the amount of time needed to file a claim. We will be working with our clients to ensure that they are aware of what information needs to be submitted and provide them with guidance as to how that form needs to be prepared.

For all accounting periods commencing on or after 1 April 2023, there will be a requirement to notify HMRC of an intention to claim within six months of the end of the relevant accounting periods. That means the first of these advance notifications will be due by 30 September 2024. Should the claimant company miss the deadline no claim will be able to be made. Claimant companies will need to consider their eligibility for R&D well before the normal two years after the end of the relevant accounting period – R&D tax credit work will need to be ‘real time’ in order that the necessary information can be submitted to HMRC.

Further R&D consultation July 2023

HM Treasury published a further consultation on R&D – but this time with some draft legislation to consider and with a proposed effective date of 1 April 2024. The main highlights are as follows:

• A single R&D relief for most companies, delivered as an expenditure credit. This is proposed to be paid at a flat 20% gross credit. This is subject to corporation tax, and so it would deliver a net credit of 15% to companies. The legislation allows this rate to change at any time
• For loss-making, R&D-intensive SME companies (those spending more than 40% expenditure on R&D), it is proposed that the enhanced rates will still be claimable after 1 April 2024 (although this would seem to contradict the wish to simplify to only one scheme)
• The proposal contains the already published restrictions on overseas expenditure on subcontractors and EPWs. This means that qualifying overseas expenditure is only that which is undertaken overseas due to geographical, environmental, or social conditions not present or replicable in the UK
• It is proposed that all companies will be able to claim expenditure paid to UK-based subcontractors, whether they are SMEs or Large Companies. However, no claim for an R&D expenditure credit can be made if the claimant company is subcontracted to the potential claimant company by another UK-based company. It seems that R&D sub-contracted from companies outside the UK to a UK company would still be eligible
• HM Treasury appear to have decided that it is better policy for the company which is taking the economic risk to claim the R&D credit. This is in stark contrast to HMRC’s recent approach to customer funded R&D – we hope that this change of direction indicates that HM Treasury and HMRC have had second thoughts about their position regarding subsidies and sub-contracted activities
• It is proposed that no claim for an R&D expenditure credit can be made for costs which are subsidised, for example, by a grant. It is not clear whether this is intended or not, albeit HMRC is now asking for comments on this aspect in particular. We hope that this amendment will be deleted to allow companies to claim qualifying expenditure where a grant is received in respect of it – as is the case with RDEC currently
• There are proposed changes to claiming externally provided worker (EPW) costs, restricting this to 65% of the staff providers’ relevant staff costs, rather than just 65% of the payment a company makes to the staff provider. This may not be workable as staff providers won’t disclose their payroll information to customers, so this will likely be changed
• There is no mention of any minimum expenditure threshold. The inclusion of such a rule was expected by many – but as things stand is not being proposed
• It is proposed that the PAYE/NIC cap by which a credit can be restricted will adopt the more generous SME cap rules.

Further announcements are expected at a future fiscal event, and we will, of course, be following these closely.

HMRC Enquiry Activity

On 2 July the Chartered Institute of Taxation submitted a letter to HMRC setting out their detailed concerns about the approach adopted regarding R&D compliance activity, together with a large body of supporting evidence.

https://www.tax.org.uk/r-d-tax-relief-crackdown-deterring-genuine-claims-institute-warns

HMRC published its own thoughts on R&D compliance in mid-July, setting out that its own estimates of fraud and error within R&D was much larger than they previously estimated (albeit there remains much doubt about these figures if they are based upon the HMRC R&D Compliance Check team’s performance and approach from the last six months). HMRC also do now appear to acknowledge that their officers do need to operate more consistently with the HMRC Charter.

https://www.gov.uk/government/publications/compliance-approach-to-research-and-development-tax-reliefs/hmrcs-approach-to-research-and-development-tax-reliefs

In general, we are seeing the number of new enquiries being opened slowing down. HMRC is taking much longer to respond to correspondence (typically in excess of 60 days). We are also beginning to see HMRC considering speaking directly to taxpayers in a small number of disputes. Furthermore, following the CIOT submission, we are not seeing HMRC adopting the automatic penalty position they had unreasonably been pushing in recent months – however it is still early days here.

Notwithstanding a few small areas of success in recent weeks the picture remains clear – HMRC will continue to devote dedicated focus on R&D claims and all claims are subject to a much higher chance of enquiry than at any time since the inception of the R&D regime in 2000. We strongly recommend that claims need to be carefully considered in tandem with advice from specialist R&D advisers before they are submitted. Of utmost importance is the supporting documentation and narrative underpinning the claims.

Summary

The UK’s R&D tax credit system remains in a state of major flux. Arguably, a decade of neglect from HMRC has allowed the R&D system to become tainted by the perception of poor behaviour by certain taxpayers and agents – which they are trying to resolve with a team of inexperienced personnel.

The net result is that those wishing to claim R&D will likely experience a bumpy ride for the next few years as the changes HM Treasury is making settle down to something which looks more ‘normal’ and taxpayers and agents better understand where certain boundaries now sit. In the interim there will continue to be a lot of uncertainty around R&D tax credits and additional care will be needed with all submissions.