Tackling the future of research and development tax reliefs
08 November 2022
Amid the reports of spurious claims that have attracted significant attention from the media recently, there is increasing speculation around what the chancellor, Jeremy Hunt, will announce in respect of research and development (R&D) tax reliefs in the Autumn Statement later this month. After all, he has been tasked with finding tens of billions of pounds to balance the public books. But will more changes to the regime itself solve the underlying problem of poor-quality advice?
HMRC raising the bar on scrutiny of claims has recently led to a number of arrests, but there are two very different issues at play here. Fraud within the R&D tax reliefs regime on a scale of any size is not acceptable and takes funds that could be better directed towards UK businesses undertaking genuine R&D activity. This is an area that should be tackled by HMRC and of course policed appropriately.
However, there is also the issue that continues to be mentioned by the majority of the R&D tax reliefs community and also in the recent Finance Bill Sub-committee inquiry and that is dealing with the number of poor-quality advisers in the market. Again, this also needs HMRC to better police the system, but in a way that does not impact genuine claimants. HMRC raising the bar is leading to more enquiries, more management time being spent by businesses and if correctly targeted, a much better managed R&D regime.
The new requirements coming into effect from 1 April 2023 to tackle abuse of the system is clearly welcomed, but does this go far enough? There are some that consider tax professionals should be subject to registration and accreditation. This might involve a ‘fit and proper’ test, and requirements to hold relevant qualifications and experience. Such a scheme could potentially enable HMRC to take disciplinary action where advisers fail to meet the required standards. Advisers who don’t meet the standard could be subject to a higher level of checks for a specified period, or ultimately being stripped of accredited status if inadequate performance continues.
Experience in other countries such as Australia has demonstrated that more stringent measures may be needed to reduce the number of fraudulent and poor-quality claims. Measures such as restricting access to the regime for certain claimants or creating a larger qualifying de-minimis spend could all be considered. Ultimately though, such changes could reduce the effectiveness of the regime in incentivising R&D activity and represent a backwards step.
Care is needed to preserve the regime’s integrity by businesses seeking better quality advisers, encouraging higher quality claims, and discouraging malpractice.
HMRC raising the bar on scrutiny of claims has recently led to a number of arrests, but there are two very different issues at play here. Fraud within the R&D tax reliefs regime on a scale of any size is not acceptable and takes funds that could be better directed towards UK businesses undertaking genuine R&D activity. This is an area that should be tackled by HMRC and of course policed appropriately.
However, there is also the issue that continues to be mentioned by the majority of the R&D tax reliefs community and also in the recent Finance Bill Sub-committee inquiry and that is dealing with the number of poor-quality advisers in the market. Again, this also needs HMRC to better police the system, but in a way that does not impact genuine claimants. HMRC raising the bar is leading to more enquiries, more management time being spent by businesses and if correctly targeted, a much better managed R&D regime.
The new requirements coming into effect from 1 April 2023 to tackle abuse of the system is clearly welcomed, but does this go far enough? There are some that consider tax professionals should be subject to registration and accreditation. This might involve a ‘fit and proper’ test, and requirements to hold relevant qualifications and experience. Such a scheme could potentially enable HMRC to take disciplinary action where advisers fail to meet the required standards. Advisers who don’t meet the standard could be subject to a higher level of checks for a specified period, or ultimately being stripped of accredited status if inadequate performance continues.
Experience in other countries such as Australia has demonstrated that more stringent measures may be needed to reduce the number of fraudulent and poor-quality claims. Measures such as restricting access to the regime for certain claimants or creating a larger qualifying de-minimis spend could all be considered. Ultimately though, such changes could reduce the effectiveness of the regime in incentivising R&D activity and represent a backwards step.
Care is needed to preserve the regime’s integrity by businesses seeking better quality advisers, encouraging higher quality claims, and discouraging malpractice.
Sheetal Sanghvi
Partner, Innovation Reliefs | Managing Partner, East Midlands
Sheetal Sanghvi
Partner, Innovation Reliefs | Managing Partner, East Midlands
