There are significant changes coming about to the R&D tax credit programme in many areas. We have summarized these changes below as well as providing some observations.
Administration, Processing and Compliance
Of upmost concern to both HMRC and the UK taxpayer is that the R&D tax credit programme is not being abused. This ranges from outright fraud to companies pushing the boundaries as to what qualifies as R&D. Recently, HMRC has had to slow down processing of R&D tax credit claims while they review some “irregular” claims. In the past, they have also found over £400M in fraudulent claims and have expressed concern that some companies are pushing the boundaries of the programme.
To deal with this, additional inspectors have been added to the R&D tax credit group at HMRC. We are certainly seeing an increase in queries of R&D tax credit claims by HMRC. HMRC is also fine tuning their software to scrutinize R&D tax credit claims as they are filed . As set out below, there are a number of administrative and filing changes. Which are to come into place that will add further checks on the R&D programme.
Recently, HMRC stated that the processing time for R&D tax credit claims has slowed. Currently, 80% of R&D tax credit claims are processed in 40 days. This is due to the resources required to review “irregular” claims. HMRC expects that by Sept/22 they will be processing 98% of R&D tax credit claims within 30 days.
Administration and Filing Requirements
HMRC is planning on setting up a portal where any first-time claimants and companies that have not filed a claim within the past 3 years will have to register their claim through a HMRC portal.
Companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using the digital service, within 6 months of the end of the period to which the claim relates. Companies that have claimed in one of the preceding three periods will not need to pre-notify.
It is also anticipated that new forms will be required to be completed. These forms will require information regarding the R&D projects. Further, a senior person at the company will have to endorse the R&D Tax Credit claim. Plus any agent assisting with the claim will have to add their details.
New Rules of the R&D Tax Credit Programme
Foreign R&D Work
This rule will likely have the most significant impact for any company claiming R&D contract work done outside of the UK for both contractors and EPW’s. This rule will come into effect April 1/23, such that no costs for foreign R&D work will be eligible for R&D tax credit relief except in a few very limited circumstances. These exceptions relate to R&D that cannot be carried out in the UK territory (for example testing in the ocean) or R&D that is required to be carried out in a foreign jurisdiction due to regulatory requirements (such as for clinical research testing).
After April 1/23, data costs will be eligible, including data storage costs. So now companies claiming for software development will be able to claim for data licensing fees, including storage. However, if the claimant has any right to publish, share, or otherwise communicate the raw data within the data set to a third party, the costs will not qualify. Additionally, any costs that go beyond the R&D project will not qualify, completely in line with the current principles behind whether R&D costs qualify.
Pure mathematics will be an eligible “field of science” after April 1/23.
For both the SME & RDEC schemes, there are restrictions to an R&D Tax Credit claim. Where the company’s most recent financial statements are not prepared on a going concern basis. An unintended consequence arises where a company transfers its trade to another party and its financial statements must be prepared on the basis that the company is not a going concern. This has led to otherwise viable companies being unable to make R&D Tax Credit claims. Legislation is being proposed to prevent this occurring.
Transition to / from SME to Large
Where all the members of a group, individually and collectively, are under the financial and balance sheet limits to be treated as an SME and one of the members of the group subsequently exceeds those limits. It may still retain its SME status under the “period of grace”. However, an unintended consequence of s1120(2) CTA09, is that all other members of the group become large straight away. Rules will be introduced to permit the other companies in the corporate group with a year grace period as well.
A Few Observations:
- HMRC is very concerned about companies pushing boundaries as to what constitutes legitimate and eligible R&D projects. The above changes are directed at identifying and following up with claimants and their agents, where claims are suspect. It will be important to have a qualified and experienced technical person to assess eligibility. Having done over 10,000 R&D Tax Credit claims, with 35 technical staff covering every field of science and technology, RDP has the expertise to assist with any R&D tax credit claim.
- Maximising an R&D tax credit claim is key; you don’t want to leave any refund or tax benefit on the table. RDP‘s proprietary Innovation Connection Programme (“ICP”) ensures that all eligible R&D projects, activities, and costs are claimed.
- Keeping on top of changes to the R&D Tax Credit programme is critical. As members of HMRC stakeholders’ group, RDP not only is current but also anticipates changes so that proper planning is carried out.
If you have any questions on our services or to hear more about our process. How it continues to evolve, and/or review your last submitted claim, get in touch with us here for a free consultation.