How will the recent changes to R&D tax relief affect companies seeking to make claims?

By Zelie Byrne, Knill James Corporate Tax Manager

All change for R&D

Jeremy Hunt recently announced changes to the rates of relief for R&D tax credits as part of his Autumn Statement. These changes follow on from reforms previously announced in the 2021 Autumn Budget, but what exactly do they mean for companies making R&D claims?

Which businesses can claim for R&D tax relief?

Many sectors can benefit from the R&D regime and it is not limited to areas considered to be high tech, such as pharmaceuticals or software development. The only excluded fields are the social sciences, for example economics, or a theoretical field, such as pure maths.

What are the current R&D tax relief schemes?

There are currently two Research and Development 'R&D' tax relief schemes, the R&D Expenditure Credit 'RDEC' Scheme for large companies and the more generous Small and Medium Enterprise 'SME' Scheme.

The schemes incentivise companies to undertake research or development through projects seeking to advance knowledge in a field of science or technology, where the knowledge is not readily deducible by a competent professional in the field.

Both schemes provide a company with additional tax relief for qualifying expenditure, although the mechanism for receiving relief differs between the schemes.

The SME scheme

Where a company meets the criteria for a claim to be made under the SME scheme, qualifying expenditure receives an additional deduction when computing the company's taxable profits. These then receive relief at the company's rate of corporation tax.

Where a company is loss-making, the loss relating to the R&D expenditure can be surrendered for a payable tax credit.

Due to the changes in the level of enhancement coinciding with the increase to the main rate of corporation tax, the changes to a profitable company are not major, but for a loss-making company requiring a boost to cashflow to fund future development, the reduction to the enhancement and the repayable credit rate could cause significant funding difficulties.

The RDEC scheme

Under the RDEC scheme, a company receives a taxable credit equating to a percentage of the qualifying expenditure. This credit is taxable and RDEC relief is therefore often referred to as the 'above the line' relief.

The reason for change – the move to one simplified scheme

R&D has been a focus of HMRC and the government for a number of years. The Autumn Statement indicated that these changes are the first step in moving to one simplified R&D scheme similar to the current RDEC scheme. No timeframe for these further changes has been given.

Who can advise on R&D claims?

The R&D claims market is unregulated and unfortunately there are some R&D boutiques that seek to exploit the reliefs available.

As an accountancy firm regulated by the ICAEW, we are required to follow the Professional Conduct in Relation to Tax 'PCRT'. Our employees who are members of an accounting or tax professional body (such as ICAEW, CIOT and ATT) are also personally bound by these guidelines when providing tax advice. R&D is a form of tax advice and there are specific PCRT guidelines in relation to R&D.

The pitfalls of an unregulated market

Not all firms that prepare claims are accountancy practices and some firms see the relief as an easy way to generate funds on a 'no win, no fee' basis. Often reports are produced on a 'light touch' basis containing minimal information to support the claim and there are even some cowboy firms producing claims which are either exaggerated, or at worst fraudulent.

New legal requirements for making a claim

The Finance Bill 2022/23 details a number of changes to the R&D claims process and the costs eligible for a claim, including measures to tackle HMRC's perceived abuse of the scheme.

These changes include:

• More detail being required when making a claim.
• Notifying HMRC in advance of a company's intention to make a claim.
• Sign-off of any claim by a named senior officer of the company.
• Providing details of any agent that has assisted the company with making a claim.

Compliance checks are increasing

We are seeing more compliance checks into R&D claims than ever before, and HMRC have dedicated additional staff to the area. Responding to queries raised under a compliance check can be lengthy and onerous, as well as costly in terms of staff time and professional fees.

How can a company protect itself when making a claim?

If you undertake a project that is seeking to advance knowledge in a field of science or technology and you believe it is eligible for R&D tax relief, you should:

• Choose a firm that is regulated and bound by the PCRT guidelines in relation to R&D to assist with making a claim.
• Include detailed descriptions of the projects, the uncertainties and how the project sought to overcome these.
• Have robust ways of recording time spent on R&D projects to support claims.

How we can help

We have many years' experience of making successful claims for clients and can you assist with:

• Producing claims and detailed reports for qualifying projects.
• Reviewing claims previously undertaken by other advisers on a 'light touch' basis.
• Helping with HMRC compliance checks.

Get in touch

If you'd like to know more about the R&D relief regime and how it impacts your company, please contact Zelie Byrne on 01273 484942 or zelieb@knilljames.co.uk