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by Adam Shire

11 August 2023

Find out the latest changes to claiming R&D tax.

Research and Development (R&D) tax credits allow innovative businesses who invest in science and technology, to claim tax relief. This week, HMRC announced that the Government has overpaid £1.13Bn to companies who were ineligible to claim R&D tax during the 2020-2021 period. This figure is a brutal increase from the initial estimate of £336m. The wrongful distribution of taxpayer’s money has been hot topic debate right up to the House of Lords.

Exact reasoning for such error is still unknown, although it is speculated that amidst the coronavirus pandemic that any HMRC staff employed to monitor R&D submissions were seconded internally to alternative departments such a furlough and CBILs. This left a metaphoric open goal for companies to receive 100% payment of an R&D repayment without scrutiny.

A cauldron of negligence, optimistic claim valuations, a lack of education around BEIS guidelines and opportunistic service providers drove the payout higher and higher, forcing HMRC to act.
Reputable and regulated financial institutions have pushed for an intervention starting with tighter regulation and increased scrutiny to protect the principles of the R&D regime and ensure authenticity of the claims they receive.

The result, the biggest overhaul of the R&D scheme since the introduction of the RDEC scheme in 2013. To implement changes, there has been 300+ additional employees recruited into the R&D compliance team within HMRC.

From April 1st 2023:

1) The super deduction for SME’s was reduced from 130% to 86% causing an immediate tangible impact to claimant companies. This does mean projects overlapping accounting periods will be subject to varying rates of relief.

2) The RDEC scheme, which benefits larger businesses, has seen an effective 65% spike in rate of relief from 13% to 20%. The most likely explanation for this change is to make the UK more attractive on the world stage to the largest employers.

3) Companies can include projects involving mathematic activities and cloud hosting costs, a welcomed change which many feel is long overdue.

More changes shall be implemented from 1st August 2023. A new mandatory digital format will go live, where all R&D claims need to be submitted, this is opportunity for HMRC to pre-screen R&D applications before an amendment to CT600 can be made. Although guidance is scarcely accessible for businesses, it is know that there will be additional information requested included director declaration, name of R&D provider who supported with the process, amongst other business data.

The digital system shall break down projects which are put forward, to give a far greater emphasis on technical baseline which exists, research which occurred into highlighting the baseline, attempts (including failed) to advance the industry knowledge of said baseline and key project dates.
HMRC are refocusing claims towards UK based R&D. Costs incurred outside of the UK shall be removed as qualifying R&D expenditure. This has been designed to encourage companies to look to local high-skill professionals. Interestingly, this change has been pushed back so it’ll only impact claims from 1st April 2024 to give UK businesses a chance to onshore their efforts.

Another new condition is digital prenotification which requires companies who have not claimed in the last three years to digitally notify HMRC of their intention to claim R&D six months ahead of the year end. It’s been put in place to allow HMRC remove the ‘double-bubble’ effect new claimants currently get by being able to submit for the previous two account periods. It should be noted that this change is highly contentious and is currently being challenged.

The changes above, has made this current iteration of the R&D scheme as complex as it has ever been. More and more business owners have been driven into the hands of expert R&D advisors to complete their claim. For many, it isn’t worth trying to learn the process themselves because one mistake in the submission can lead to a lengthy investigation process.

If you’ve championed innovation and are interested in claiming R&D tax credits, it’s vital that you choose a business that you can trust to support you with your application. As mentioned, errors made on the form can draw out the process, and HMRC are more vigilant than ever before. Should you have any questions relating to any projects, costs or alterations to the R&D scheme then please click on the link below and one of the Silicon Yorkshire team will be in touch!

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