Research and development tax relief in the UK allows companies undertaking innovative activities and qualifying research and development projects to claim corporation tax relief and/or tax credits on qualifying research and development expenditure.
The aim is to encourage UK innovation by providing relief on qualifying spending on research and development, effectively reducing the cost of research and development work for qualifying companies. This has enabled companies to invest in vital research and development that aims to make scientific and/or technological advances, typically leading to further employment and increased skill in the UK. It is universally recognized that without innovation in business, economies will not grow, so a reduction in tax relief for research and development and discouraging good companies from making claims could cause the UK to fall behind other major world economies.
R&D tax relief has been in existence for more than 20 years, however huge changes have occurred in the last two years, including a significant increase in HMRC claims. Over the life of R&D programs, the number of companies claiming R&D tax relief has increased exponentially, partly because companies and their advisors have become more experienced and adept at identifying qualifying R&D activities, but also because some companies, often misled by rogue R&D consultants, have pushed the boundaries of the legislation, leading to the submission of exaggerated and fraudulent claims.
Historically, HMRC’s application rate was 1% and the vast majority of R&D applications were processed with little or no questions. This all changed a couple of years ago with the introduction of HMRC’s ISBC R&D inquiry team. It was widely accepted in the accounting and tax profession that a change was needed to address inflated and fraudulent R&D claims, however, the consequences resulting from HMRC’s sledgehammer approach to investigations, coupled with changes in legislation reducing the amount of relief available, have had a negative impact. disastrous impact for genuine claimants and has the potential to cripple the UK economy and innovation.
The ISBC unit was mainly staffed by newly trained and inexperienced research and development staff and, although the investigation process rightly sought to target companies making excessive and fraudulent declarations, HMRC’s volume-based approach to investigations have also targeted genuine, qualified companies, who have been involved in protracted investigations, where in some cases, HMRC has ignored evidence and denied companies the opportunity to discuss R&D claims in person , instead taking a narrow approach to deny genuine, qualified businesses this vital tax relief.
For other HMRC taxes, when investigations are opened, there is usually an appointed HMRC caseworker/inspector, allowing a level of understanding, direct contact and collaboration between taxpayers, consultants and HMRC to ensure that the correct amount of tax is paid, which allowed for fairness and confidence in the investigation process, entirely in line with the taxpayer statute. Unfortunately, this is not the case with the ISBC unit as the names of the HMRC staff conducting the investigations are not provided, thus reducing accountability and recourse in the event of serious errors.
The accounting/tax profession and related professional bodies have been understandably furious at HMRC’s failings and the negative consequences it is having on companies that actually undertake qualifying research and development. Some businesses have been pushed into serious financial difficulty and many have thrown in the towel, deciding not to challenge HMRC’s decision to reject their claim, as they do not have the resources to fight against the might of HMRC. Businesses have the option to appeal HMRC decisions to a tax tribunal, but doing so requires significant cost and time that many businesses simply cannot afford, particularly start-ups.
It is easy to overlook the significant and cumulative negative effect that a lack of investment in innovation by businesses could have on the UK economy in the future. With thousands of legitimate companies qualified for R&D facing an unfair and unfair investigation process, and the negative consequences this has brought, many have had no choice but to reduce the resources spent for innovation or to stop it completely. While tax receipts from HMRC denying legitimate claims may appear to increase in the short term, the long-term negative effect on the growth of the economy and associated tax receipts could be devastating, with ramifications across all sectors and supply chains.
The Chartered Institute of Tax (CIOT) has written comprehensive open letters of complaint to HMRC about the serious shortcomings occurring in the current R&D investigation process. However, despite HMRC acknowledging its lack of training and that serious errors have been made, not enough is being done to remedy HMRC’s shortcomings or to deal with unscrupulous R&D consultants.
The reduction in tax relief available, the increase in costs needed to support R&D claims, combined with the increased risk of HMRC denying companies actually benefiting from R&D tax relief, have significantly dissuaded companies from investing in innovation, creating a perfect storm and a potentially disastrous effect on growth. in the economy going forward.
It is now more important than ever for genuine R&D applicants to ensure they are working with experienced and trustworthy R&D tax advisors. Working with your consultants throughout the year to develop your R&D strategy, understand the complexities of your R&D programs and growing requirements and capture evidence in ‘real time’ is now essential, to support their R&D requests and mitigate the risk of an investigation. Gone are the days of the lighthearted approach to the end of the accounting year; It is vital that companies choose the right R&D consultants and question the advice they receive. If something seems too good to be true, it often is. But with the right consultants, expert advice and a solid R&D strategy, companies can navigate through the complexities of R&D programs to ensure that, if HMRC asks questions, their claims will stand up to this scrutiny intense and rigorous. This in turn should help restore a level of confidence in R&D tax relief schemes and encourage the innovation and growth the UK economy needs.
About the author:
Rory Fothergill is an experienced senior manager of research and development and tax consultancy at JS Accountants and Business Advisors. He has extensive experience supporting companies with R&D requests, advising on how to strengthen and protect requests, advising on R&D systems and processes and successfully dealing with HMRC R&D requests. Rory and JS also provide specialist R&D support and advice to clients of smaller partner accountancy firms, to ensure their clients can also benefit from expert and expert comprehensive R&D support.