16 May 2023
Over the course of 2022, those claiming R&D tax incentives, and advising businesses in making claims, became aware that abuse of the system, and in more isolated instances, fraud, was rife, leading to increasing pressure on HMRC to more effectively identify and tackle such behaviour. This became more prominent in the media and the tax profession when a leading newspaper ran a series of articles highlighting abuses of the system, and a House of Lords subcommittee formed to investigate proposed changes to the regime published findings that were critical of HMRC’s historic track record in policing such abuse and fraud.
The goal of these generous tax incentives – to encourage innovation in the UK – is one that most would support. Unfortunately, however, the perceived need for government and HMRC to address abusive behaviour by some taxpayers and advisers may have resulted in an overcorrection that has a real and tangible impact on the many legitimate claimants.
HMRC compliance checks (enquiries)
Compliance checks by HMRC on R&D tax relief claims are far more commonplace than they have been in the past. Despite HMRC’s own internal guidance stating that, ‘an open-minded approach should be adopted as to whether a project, or part of a project, is relevant R&D’, in many cases we find this approach has not been adopted. This results in both companies and their advisers needing to devote significant efforts to an often-protracted process of negotiation and providing additional evidence, exchanging written correspondence (as HMRC has in many instances declined to engage in verbal discussions as part of these enquiries, under a new approach) in pursuit of a resolution. We sincerely hope that HMRC will quickly realise the impact this is having on genuine claimants and will return to the more collaborative approach with which it used to engage with companies and their advisers in the past.
Additional information form
In an addition to the compliance burden, any companies submitting R&D tax relief claims to HMRC after 31 July 2023 will need to have first submitted a digital ‘additional information form’, which requires (amongst other information):
- specific details in relation to the activities undertaken and expenditure incurred;
- the identity of any agent that has advised in relation to the making of the claim; and
- the identity of the individual in the company responsible for making the claim.
The format of the disclosure of financial and technical information will also be a noticeable change for many claimants, with an emphasis on providing this on a ‘per project’ basis. For claims involving larger numbers of projects, this will add time and complexity to the submission preparation.
With only a matter of months until this requirement takes effect, many claims that will be affected are already being prepared, and claimants will need to consider whether their current approach will meet the new requirements.
Forewarned is forearmed
We hope that the more challenging approach to compliance checks adopted by HMRC is a short-term issue, and that once HMRC is comfortable that its actions have served to combat fraud and abuse, a more collaborative approach to engaging in dialogue with claimants and their advisers will return. In the meantime, however, businesses should be prepared for the increased likelihood of HMRC compliance checks into any claims made.
As regards the additional information form, claimants should consider the impact of this new requirement together with the other recent and upcoming changes to the R&D tax relief regimes, considered in more detail here. In particular, claimants should assess whether their next claim can be submitted ahead of the 31 July deadline, and if not, agree with their advisers how to change the claim process to ensure it will be compliant.
For more information, please get in touch with James Tetley or your usual RSM contact.