New UK Tax Relief Policies Put Innovative SMEs at Risk of Losing R&D Claims

Substantial changes to the processes surrounding requests for tax reliefs on Research & Development (R&D) expenses might invalidate a substantial number of these claims. These concerns were shared by Chris Dale, a Partner at Azets, a leading business advisory firm.

Since 8th August, when these new rules came into play, almost half the companies have had their claims rejected by the HM Revenue and Customs (HMRC), signalling the aggressive implementation of the previously announced compliance guidelines to R&D tax relief claims.

Effects of the New Documentation Requirement

This change will inevitably make its presence felt among small and medium-sized enterprises (SMEs). Especially those which are on the innovative frontier and gearing up for the completion of their year-end accounts that extend past the beginning of April 2023, when the rates for the R&D tax reliefs will have dropped.

To accompany the recent compliance changes, a few days past the 8th of August, HMRC introduced newly mandatory digital information forms that need to be submitted with the R&D claims. These forms have proven challenging for nearly half the companies submitting their claims.

Invalid claim letters will soon inundate the postboxes of companies that failed to comply with the new forms. For those firms that have procrastinated with their submissions, this could potentially mean a lost claim.

As of now, no details have been provided about the number of companies that have faced the brunt of claim rejection between 8th August and 30th September. However, given the total of 89,300 R&D claims in the UK for the tax year of 2020-21, one could anticipate that this figure runs into the thousands.

Why Change the Submission Requirements?

This shakeup in administrative regulations primarily aims at weeding out fallacious and fraudulent R&D claims.

To strengthen its efforts against malpractice, HMRC, starting from August, mandated businesses wishing to submit R&D tax relief claims to provide an ample amount of additional information. This now includes detailed descriptions of the R&D work, the breakdown of costs across qualifying categories, the naming of any assisting agent or advisor, and even an endorsement from a prominent officer of the business.

The past few years have seen a surge in HMRC investigations pertaining to R&D tax relief error and fraud. This rise has been in response to the growing number of unregulated R&D tax consultancies and the added weight of R&D tax credits on Treasury’s shoulders, post Brexit implementation.

In the tax year 2020-21, the total estimate for errors and fraud across both R&D tax relief schemes – the SME and R&D expenditure credit, which span all sectors of the economy, amounted to an astounding £1.13bn. This accounts for around 16.7% of all claims, a number which alarmingly exceeds HMRC’s earlier published estimate of 3.6%.

In better news, the latest HMRC data point towards an upsurge in qualifying R&D expenses carried out by UK companies. The tax year of 2021-22 saw an additional £3.3 billion in expenditure, taking the total amount to £44.1 billion.

Further Changes on the Horizon

Signalling further changes, the Government is considering a revamp of the R&D tax relief regime. This proposition comes on the heels of HMRC’s campaign against malpractice and the public consultation conducted earlier this year.

To summarise, the government proposes:

  1. A merger of the two separate schemes – A primary component of the Government’s consultation earlier this year involved introducing a single system of relief, mirroring the current RDEC (large company) scheme. However, there may be two potential exceptions.
  2. Larger corporations would be able to claim expenses for qualifying payments to subcontractors, paralleling the current SME scheme. This could benefit some companies within the RDEC scheme by widening the scope of qualifying expenditure.
  3. A generous cap on benefits available to companies under the SME scheme is also under consideration, as opposed to the currently restrictive definition adopted by the RDEC scheme. This move could mean higher relief for some companies.

In the face of these changes and adjustments, businesses across the UK need to keep abreast of the tweaks and turns in these policies and ensure their claims are in line with these upgrades to avoid missing out on their due tax reliefs.