One in five applications for research and development (R&D) tax relief are now under investigation by HMRC. But, if they ensure they get the right expert advice, businesses shouldn’t be scared of this potentially useful source of funding.
There’s been a 20-fold increase in HMRC enquiries into the eligibility of R&D tax relief claims made by UK businesses, according to a recent House of Commons report.
Also known as compliance checks, the agency’s investigations can often last several months and quite apart from the obvious risk of reputation damage, the financial fall-out could even threaten the future viability of some businesses.
Significant abuse has been found
The clampdown has been launched because the government has uncovered significant abuse of the R&D tax relief system. Most recently, estimates indicate a level of “error or fraud” of £1.1 billion from claims totalling £10.2 billion for 2022-23.
Justine Dignam, Director of Tax Incentives and Reliefs at Markel Tax, believes a “huge number of spurious claims” have been made over the past decade, with many down to poor or incorrect advice from the agents that assisted companies in making tax relief applications.
Businesses being investigated by HMRC face repaying up to 100% of the relief they claimed, plus penalties of up to 100% of the value of the claim, depending on the nature of the errors in the application and whether HMRC deems them to be deliberate or not.
“I’m sure there will be some insolvencies as a result – if you're looking to claw back £1.1 billion there's going to be some casualties”
Justine says: “If those businesses have knowingly submitted invalid claims, then it's quite right they should be punished but, sadly, there will be a number of businesses that have taken what they thought was professional advice and are now in a position where the financial repercussions could have some serious implications on their cashflow.”
She adds: “I’m sure there will be some insolvencies as a result – if you're looking to claw back £1.1 billion there's going to be some casualties.”
Businesses need good advice
In response to the high levels of system abuse, HMRC now require companies to make all relief claims digitally and the identity of the R&D agent, if appropriate, must be disclosed. Submissions must also be endorsed by a company director and the business’s accountant.
Justine is sure these reforms will help but stresses expert advice is still the key if businesses want access to R&D tax relief: “R&D claims are increasingly complicated because of recent changes in relief rates, changes in qualifying dates for application and changes in qualifying expenditure.”
She adds: “Businesses undertaking R&D work should 100% claim relief, but the problems of recent years show they need to be very conscious of who they partner with in making submissions.
“Their first port of call should be their accountant as a trusted adviser. If your accountant can’t provide expert R&D tax guidance, they should be able to recommend a reputable provider that does have the requisite special skill sets.
“At the core of an application, claimant companies must show their R&D work seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty, and specialised knowledge is needed to assess the validity of a claim.”
Making best use of tax relief
Professional, specialised expertise is also needed in understanding how to make the best use of R&D tax relief. Many businesses will opt to apply it as a reduction in the rate of corporation tax they pay.
However, loss-making companies can receive a partial or full cash credit for their R&D expenditure, which is useful for businesses such as start-ups in the early stages of developing new science or technology.
As an R&D specialist tax adviser, Markel Tax’s expert team includes scientists and engineers who specialise in a wide range of sectors, from medicine and aviation to computer software and pharmaceuticals. Justine adds: “Just as importantly, we don’t believe a company should ever submit an R&D claim without involving their accountant.”
We’ll challenge your claim
She continues: “It's vital you partner with people with the understanding that enables them to challenge your claim – we decline eight out of 10 leads that come our way and then we will explain to companies why they don't qualify.”
“If the claim is valid, you then need a partner that can help produce a coherent, concise technical report which will help HMRC make the final R&D tax relief decision.”
“It's vital you partner with people with the understanding that enables them to challenge your claim"
Justine is keen businesses aren’t scared off from claiming R&D tax relief: “That would be a shame,” she says, “because the R&D relief scheme is generous and the spirit of it is excellent in trying to help UK businesses that are innovating and seeking to make advances in science and technology.
“We're really optimistic that the recent changes in submitting applications will see the creation of a better environment that involves qualified tax agents capable of making correct and robust cases to HMRC. We all want to see valid claims paid so that we still have high levels of innovation in the UK and for it not to go overseas.”
As of 31 March, this year, the R&D expenditure credit (RDEC) and the small or medium enterprise (SME) schemes have been merged. Go to the gov.uk website for more information.
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