R&D (Research & Development) Tax Relief has been hugely valuable for innovative companies throughout the pandemic, and according to the latest statistics, businesses claimed R&D relief on over £47.5 billion in 2019 and this is expected to have increased again when the 2020 numbers come out in due course.
The government have, therefore, been closely looking at the relief and how it is targeted, to make sure it is meeting its policy aims. As a result HMRC published a document on 30th November (Tax Administration and Maintenance Day) with three key changes proposed at a high level.
Broadly (and slightly cynically) speaking, these seem to be aimed at making it more difficult for companies to claim, and while they will undoubtedly help the ongoing battle against fraudulent and incorrect claims, they look set to adversely affect a lot of small and medium sized businesses carrying out genuine R&D activities.
I attended the HMRC’s R&D Communication Forum last week, which meets two or three times a year, and it was probably the most adversarial one I have attended. This seemed to be because the meeting was hot on the heels of a significant HMRC tribunal loss in the “Quinn” case concerning whether client led R&D was subsidised or not, and although as a First Tier Tribunal decision it does not set a binding precedent going forward, it is nonetheless a very strong indicator that HMRC’s interpretation of certain rules may be flawed.
It was clear that HMRC are smarting from that defeat and they were very keen to point out that it is not binding, and they will continue to challenge similar cases.
The rest of the meeting was spent discussing the proposed changes, which are as follows:
- A proposed restriction to only allow UK based R&D costs.
- An obligation on claiming companies to “pre-notify” their intention to claim for an accounting period.
- A proposal for a senior officer of the claiming company to personally endorse the claim.
At this stage these are high level proposals, and with some of my professional colleagues at the Chartered Institute of Taxation, we have a meeting with HMRC early in the New Year to discuss in more detail, before we respond formally to the proposals.
The first of the above is a major issue for companies that may use development teams outside of the UK – very common for software developers, for example. This means that where a non-UK subcontractor works on the R&D project, their costs could no longer be included. Interestingly, this is only a restriction on subcontract costs, not employee costs, so having overseas residents as direct employees of the company would still appear to be fine.
The second is significant, if a little confused as the messages in the meeting were mixed, but we believe the proposal to mean that a company must make a formal notification to HMRC, before the end of an accounting period, that it intends to lodge a claim for that period. This would mean that companies carrying out genuine R&D but who were not aware of the relief would no longer be able to look back two years to claim, as they can now, because they would not have made that notification.
The proposals will clearly be tweaked and modified (and not all may survive) over the next few months, but those that do go through will be effective from April 2023. So there is some time to plan ahead at the moment with some idea as to where the changes are heading.
The message remains the same as it has for many years – do make sure that you are claiming if you are entitled to, and speak to an expert if you are not sure! At the moment you can still back claim for two years if you are eligible, but that ability could soon be a thing of the past.
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