There has been a significant spike in R&D claims submitted to HMRC by care providers and other businesses which would not normally be eligible for this type of tax credit. According to HMRC’s latest estimates, up to 50% of these are non-compliant.
Care home managers may have become unsuspecting targets for firms seeking to take advantage of a lack of the resources needed for HMRC to scrutinise all R&D claims. Adam Ellerington, Senior Tax Manager at Markel, outlines what is behind this trend and how other types of tax relief could offer a better, more-compliant option for care providers and others.
R&D tax credits are intended to encourage companies to spend time on research and development. Examples of activities companies might normally expect to be covered by R&D credits include software development, prototype building, patents and redesigning products, typically in the science and technology space. But, increasingly, non-compliant claims from care providers for R&D tax relief on items such as prescription medications have been submitted to HMRC in recent years, following an “explosion” in new R&D providers which have spotted an opportunity, Adam says.
"It remains as important as ever to not take risks with your claim because HMRC is adopting a much firmer approach"
“You need to be improving science or technology in a way that pushes the boundary of what's known and what's publicly available knowledge in a particular field of science and technology (to be eligible for R&D tax credits). And, for a start, it's difficult to see how in a care home that would be the case,” he explains.
Speculative submissions
In recent years, more and more companies realised that R&D claims could be successfully submitted for non-typical businesses and that HMRC appeared to not have the resources to scrutinise all these claims. These companies started making more speculative submissions for a number of different – possibly non-compliant – items, leading to a “wild west market,” with care providers being just one of a number of business types being targeted.
“There’s a huge number of R&D firms that have arisen over the last few years and some of them do a good job… but some of them take a really, really poor approach and just aren't scrutinising claims properly,” Adam explains.
Conversely, R&D claims are increasingly being rejected by HMRC for a variety of reasons, and “it remains as important as ever to not take risks with your claim because HMRC is adopting a much firmer approach,” he adds.
"Care providers should instead focus on maximising their capital allowance claims, which offer much more potential than R&D claims for these businesses"
The R&D tax landscape has been changing rapidly in recent years, with a crackdown on fraud by HMRC and a huge increase in the number of its staff now working on compliance. Most recently, in the 2024 Spring Budget Chancellor Jeremy Hunt announced government plans to tackle tax non-compliance generally by investing in HMRC’s ability to collect outstanding tax debts, which are expected to stand at over £4.5 billion by 2028-29. Care providers and others need to be properly informed of their entitlements to avoid unnecessary costs, and sleepless nights, for business owners.
Maximising capital allowances
Care providers should instead focus on maximising their capital allowance claims, which offer much more potential than R&D claims for these businesses, to avoid the risk of filing potentially non-compliant claims, Adam advises. More than 50% of eligible businesses fail to claim their full capital allowances entitlement, according to figures from Markel’s tax investigation team.
Further, although many accountants will be well-versed in what a specific care home can and cannot claim for under general plant and machinery capital allowances, an opportunity that is quite often missed is claiming for the so-called ‘integral features’ of a property, meaning a care provider or other business can potentially miss out on a significant amount of tax relief.
Claims under the umbrella of integral features can be for external solar panels, water heating and powered ventilation and air-cooling systems, among other fixtures and fittings of a building. However, different hurdles exist for purchasing an existing property or building from scratch in terms of claiming for integral features – but, with the right analysis and site survey, care home providers can remain compliant and extend their tax relief gains with standard capital allowance claims plus the addition of integral features.
The challenge comes as it can be difficult to calculate the value of the integral features alongside the bricks and mortar of a building, and so many standard audits overlook this form of tax credit, which may be the root of potential claims going un-filed and significant tax relief unrealised for care providers.
Markel’s capital allowances team has been involved with significant integral feature capital allowance claims for care providers, in one case for as much as £2 million for the conversion of an office building into a large care home, Adam says.
