As a result of the recent Autumn Statement, the tax relief rates for the SME programme has been cut drastically by roughly 40% on average. The reason is that the SME programme has grown exponentially over the last 8 years. But HMRC believes many companies are not meeting the eligibility criteria.
This happened in part because a high percentage of R&D tax credit claims were accepted “as filed”, without any scrutiny by HMRC. Our experience is that when companies hear there is low chance of review by HMRC they will take a chance and file an R&D claim. Especially if they are supported by outside R&D service provider firms that do not follow the rules.
Happened in other countries
This has happened in other countries like the US and Canada. Both the US and Canada reacted to curb this abuse by carrying out very strict reviews of R&D tax credit claims. It took about 3 to 4 years, but the programmes were brought back in line. In Canada, for example, the number of R&D tax credit applicants/claimants were reduced from 30,000 to 20,000.
If we look at the UK, about 90,000 companies are applying to the R&D tax relief programme each year. Of the 90,000, 82,000 are SME’s. The population of the UK is about 69M, and Canada’s population is about 40M. Both countries have roughly the same number of businesses per capita, and the R&D criteria are the same. If Canada has a robust R&D tax credit claim review system by the tax authorities, and 20,000 companies claim each year. That would suggest the number of claimants in the UK should be 35,000 (20,000/40M x 69M). This is a far cry from the 90,000 that are currently filing R&D tax credit claims each year.
In addition to the increase in compliance checks by HMRC, the tax relief rates effective 1 April 23 are being slashed by roughly 40%. Further, foreign contract fees will no longer be eligible for years commencing after 1 April/23.
HMRC to introduce a new portal
Finally, HMRC is shooting for 6 April/23 to open a new portal where companies will have to input information about their R&D projects. This is in addition to the filing requirements on the CT600. Further, any companies filing for the first time, will have to fill out a notification on the portal. That they will be filing an R&D tax credit claim along with a rough outline of the R&D project.
Now more than ever the objectives of any company filing an R&D tax credit claim are to:
- Understand the criteria as to what constitutes an eligible R&D project and ensure nothing in the submission will cause HMRC concern. HRMC will be looking for common errors companies make especially in the narrative. That describes how the company meets the definition and criteria for R&D tax relief.
- Ensure that no stone is unturned and that all eligible projects, activities, and costs are claimed.
This is where RDP’s Innovation Connection Program (ICP) comes in. Over many years, RDP has developed and continues to develop our ICP. Essentially the objective of the system is to identify and capture all R&D work in real-time. Furthermore, it should only take one person 15 minutes once a month to update the system. RDP will also check regularly to ensure the system is being kept up appropriately.
ICP – Innovation Connection Programme
The benefits of RDP’s ICP are that:
- All R&D is captured as it occurs so nothing is missed or forgotten, and the R&D claim is maximized;
- The R&D claim is ready at year-end and can be filed immediately;
- The system provides full support when HMRC asks for contemporaneous documentation; and
- It is easy to use as we customized it to the clients needs.
If you have any questions regarding the ICP, any other questions on your compliance checks by HMRC or on the R&D tax credit programme, please contact Jenni on [email protected]