R&D regime changes call for diligence

The new guidance from HMRC regarding the R&D tax scheme shows that the Government is taking action against false claims, resulting in a more thorough examination of businesses.

According to Tim Pinkney, Director of Professional Standards of the Institute of Financial Accountants (IFA), it is crucial for clients to fully understand the impact of these changes.

What’s the reason behind the changes?

The Government announced plans to simplify the R&D tax relief system in its Autumn Statement. These changes will have a significant impact on businesses, particularly SMEs, by making it easier for them to access R&D tax credits. The aim is to broaden the range of activities that qualify for tax relief, encouraging more businesses to engage in R&D projects and benefit from the tax incentives.

How has it been modified?

The accounting periods for the UK’s R&D regime have changed significantly since it was implemented on 1 April. A new plan that combines the prior RDEC and SME R&D relief schemes has been created as a result.

The primary goal of this change is to make the R&D tax relief procedure more accessible to companies of all sizes by streamlining and simplifying it. However, some limitations on the use of overseas funds for R&D tax breaks have been implemented as part of these modifications.

Clients with international operations should carefully consider these restrictions to ensure compliance with the new regulations, even though they may be seen as a necessary measure to ensure resources are allocated properly and prevent misuse.

These changes serve as a reminder to accountants that in the ever-evolving field of research and development, they must be flexible and alert to stay on top of emerging policies.

Does this mean bolstered support for SMEs?

In a nutshell, yes. A new R&D scheme  is now available with lower thresholds for SMEs facing losses. Effective immediately, the mandatory threshold for accounting periods beginning on or after a certain date has been lowered from 40% to 30%.

HMRC is also taking stronger action against false R&D claims, so accountants should exercise further diligence. Increased scrutiny may require some businesses to repay funds they have claimed through the scheme. This emphasises how crucial it is for R&D claims to be legitimate and accurate in order to avoid fines and future financial obligations.

What are client consequences of non-compliance?  

With all the legislative changes occurring both now, and, in the future, HMRC’s chief focus remains on compliance. Recently, it was discovered that over 20% of R&D claims are being investigated for compliance issues.

HMRC announced plans to significantly increase its workforce in 2023, adding 289 new employees (a 230% increase) from 88. The goal of this staff increase is to strengthen risk-based compliance initiatives. In addition, the number of cases that HMRC has started has increased by an astounding 627%. What’s more, the period for assessing claims has been expanded; the prior KPI of processing 95% of claims in 28 days has been changed to processing 85% of claims in 40 days.

HMRC estimates that for 2022–2023 there will be a staggering £1.1 billion in errors and fraud, almost 10% of the total £10.2 billion claimed for support. These figures highlight the necessity of stringent adherence as well as the implementation of practical safeguards against false or fraudulent claims.

The focus HMRC places on compliance serves as a reminder to people and companies that adhering to rules and regulations is crucial to avoiding fines and preserving public confidence in the tax system. It also aids in preventing reputational harm from non-compliance.

The updated compliance guidelines from HMRC in October 2023, along with the new requirement for companies to include the additional information form when filing an R&D claim, demonstrate a focus on documentation and minimising errors and fraud in the R&D tax process.

How do clients make a qualified claim?

To submit a compliant qualifying claim for R&D, clients must acquaint themselves with the R&D criteria applicable to their organisation. Accountants will also help them along the way and offer vital support in the event that HMRC chooses to thoroughly examine the claim.

Are there any more planned changes?

In the Spring Budget, the Government declared that it would form an expert panel to provide guidance on R&D tax breaks. This group will cover a range of sectors, including the life sciences and technology.

Additionally, a public consultation which closed on 29 May is collecting suggestions for raising the bar for tax advice standards. One suggestion is to require tax professionals to become members of a recognised professional body in order to address issues with advice from practitioners who are not affiliated. As a result, it is anticipated that HMRC will further modify its processes.

It is critical for accountants to help businesses thoroughly evaluate the effects of these changes and plan ahead to reduce risks, especially in light of the numerous changes to R&D tax relief that have occurred in the last year and the rapidly evolving R&D environment.