R&D regime changes: what clients should know

The recent HMRC advice about the R&D tax scheme highlights the Government’s crackdown on false claims, leading to more careful examination of businesses. Tim Pinkney, Director of Professional Standards for the Institute of Financial Accountants (IFA), says clients must grasp the implications of these changes.

The Government announced in its 2023 Autumn Statement plans to make significant changes to the R&D tax relief system. These changes are expected to greatly affect how businesses, especially SMEs, utilise R&D tax credits. The goal is to make it easier and broaden the range of activities that qualify for the tax relief, to motivate more businesses to engage in R&D projects and take advantage of the tax benefits.

New merged scheme 

The UK R&D regime, which was introduced on 1 April, has undergone significant changes to its accounting periods. These changes have resulted in a new scheme that combines the previous RDEC and SME R&D relief schemes. The main goal of this alteration is to simplify and streamline the R&D tax relief process, making it easier for businesses of all sizes to access. However, as part of these changes, certain restrictions have been put in place regarding overseas expenditure in R&D tax relief. While this may be seen as a necessary measure to ensure resources are allocated properly and prevent misuse, clients with international operations need to carefully consider these restrictions to ensure compliance with the new regulations. These modifications serve as a reminder to accountants that they need to be adaptable and vigilant in order to keep up with emerging policies in the ever-changing field of research and development.

More support for SMEs 

SMEs facing losses can now access a new R&D scheme with lower thresholds. The required threshold has been reduced from 40% to 30% for accounting periods starting on or after a specific date. Accountants need to be mindful that HMRC is cracking down on fraudulent R&D claims. Some businesses may have to repay funds claimed through the scheme due to increased scrutiny. This highlights the importance of accuracy and legitimacy in R&D claims to avoid penalties and financial obligations in the future.

Compliance remains priority  

Despite the numerous legislative changes happening now, and in the future, one thing remains clear: compliance remains a key focus for HMRC. It has recently revealed that more than 20% of R&D claims are currently undergoing compliance checks.

This has been highlighted by HMRC’s 2023 announcement of plans to significantly increase its workforce, with the number of staff rising from 88 to 289, a 230% increase. This boost in personnel is aimed at enhancing risk-based compliance efforts. Additionally, there has been a remarkable 627% surge in the number of cases initiated by HMRC. Furthermore, the timeframe for evaluating claims has been extended, with the previous KPI of processing 95% of claims within 28 days now revised to 85% of claims within 40 days.

According to HMRC, the amount of error and fraud in 2022-23 is estimated to be almost 10%: a whopping £1.1bn of the £10.2bn claimed in support. These numbers emphasise the importance of strict compliance and the need for effective measures to prevent incorrect or fraudulent claims. HMRC’s emphasis on compliance is a reminder to individuals and businesses that following regulations and guidelines is essential to avoid penalties and maintain trust in the tax system. It also helps in avoiding any damage to reputation due to non-compliance.

The new requirement for companies to include the extra information form when filing an R&D claim, as well as the latest compliance guidelines from HMRC in October, shows a focus on documentation and minimising errors and fraud in the R&D tax process.

Making a qualified claim

Clients need to familiarise themselves with the R&D criteria applicable to their company in order to make a compliant qualifying claim for R&D. Accountants will also assist them throughout the process and provide crucial support if HMRC decides to scrutinise the claim in detail.

Further transitions expected 

The Government announced during the Spring Budget its intention to create a team of experts to give advice on R&D tax relief. This team will cover various industries such as technology and life sciences. Moreover, a public consultation to gather ideas on improving tax advice standards, closed on 29 May 2024. One proposal is to mandate tax practitioners to join a recognised professional body to tackle problems with advice from non-affiliated practitioners. Consequently, HMRC is expected to make more adjustments in their procedures.

With the many changes in R&D tax relief in the past year and the quickly changing R&D environment, it’s crucial for accountants to assist businesses in thoroughly evaluating the effects of these changes and planning ahead to reduce risks.