Tackling R&D abuse – Will your claims still be compliant?

25 April 2022

HM Treasury is focused on ensuring tax reliefs and government investment is correctly channelled and meets government policy aims, as underlined both in a consultation paper last year and in the Spring Statement.

Over the next five years, the government has allocated £161m to increasing HMRC’s capacity to handle tax compliance and manage debt. This investment is in addition to the 100 compliance officers brought in over the last two years to focus solely on the growing number of R&D claims.

Several changes to the R&D claims submission process are proposed, including requirements that:

  1. claims be made digitally;
  2. more detail be provided along with the digital claims;
  3. claims be endorsed by a senior company officer;
  4. the company inform HMRC in advance of its intention to make a claim; and
  5. the details of any agent who has advised the company in making the claim be included.

Recommendations

While we’re still waiting for clarification as to how each point is to be administered, for compliant companies in the life sciences sector the second point (provision of detail) is likely to need the greatest degree of input.

Many life sciences companies do not always prepare supporting documentation, or simply give high-level or poorly expressed detail, because they consider their R&D to be self-explanatory or ‘obvious’. However, that will need to change to meet the proposed expectation that the filing should be accompanied by details on what expenditure the claim covers, and the nature of scientific advances and uncertainties.

Life sciences companies will need to revisit their submissions and claims processes to ensure ongoing compliance. Submitting little or no supporting information will likely prompt queries from HMRC that can be time consuming to respond to and therefore slow the receipt of much-needed payable tax credits.

Even if companies have been submitting claims for years through simply including a number in the tax return, or with minimal documentation, it should not be assumed that this historical lack of scrutiny will continue. The proposed additional compliance measures, alongside the increased resources at HMRC, will result in many companies facing new compliance checks that could, at best, impact cash flow and, at worst, result in protracted enquiries, denial of claims and penalties.

Well-worded supporting reports submitted with an online tax computation can allay the tax authority’s concerns with respect to:

  • the company’s understanding of the guidelines;
  • how these have been applied; and, importantly,
  • the boundaries that have been drawn.

However, despite the highly qualifying nature of the work in the life sciences sector, the time required to prepare this detail will be a key consideration. The documentation needed to ensure the appropriate level of technical depth that satisfies HMRC’s needs, yet is clear and concise, will require input from the company’s scientists. A reputable advisor (whose name is proposed to be included alongside the submission!) can help to meet this need, and ensure that this preparation exercise does not become an onerous task.

How RSM can help

To discuss the impact of these changes in more detail, please contact our specialists:

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