Research & Development (R&D) Tax Relief Incentives in the UK have been in place for over 22 years, which is comparatively young against jurisdictions such as the US and Canada, which have had their R&D credits in place for over 40 years. In the most recent of years Her Majesty’s Revenue and Customs (HMRC), the UK’s administrating agency, has taken significant steps to improve the scrutiny of R&D tax relief claims made by Small and Medium-Sized Enterprises (SMEs) and Large Companies to ensure the uptake remains genuine.
The notion of genuine being the key point here. A cap on the maximum credit paid out (based on payroll tax liability) has since been reinstated with some changes from April 2021 as an anti-abuse provision. When previously abolished, HMRC indicated that the affect would be monitored, and the reintroduction feasible if the risk of fraud increased.
Sadly, the level of abuse and fraud in claiming illegitimate R&D claims has grown, which HMRC valued at a loss in tax revenues to be worth £311 million (3.6% of total relief) between 2020 and 2021. In some of these cases, companies were being set up specifically to claim the generous R&D credits, despite the company having non-existent employment or activity in the UK.
In addition to making changes to the legislation surrounding the amount of credit payable to a company, HMRC recruited 100 additional auditors at the beginning of 2021 to increase levels of review over R&D claims. Almost immediately, HMRC sent out letters to UK companies to ensure that they reviewed their process in claiming R&D tax credits and to ensure they met the complex legislation in place.
The exact impact of recruiting the additional caseworkers has yet to be seen, however HMRC has clearly strengthened its position in terms of what to expect over the coming years in terms of audit scrutiny.
We can expect these HMRC auditors to focus on claims and typical errors such as:
- Claims with no staffing costs included.
- Claims with a high percentage of total R&D expenditure being subcontractor costs.
- Companies not recognising they are not SMEs or are in receipt of funding/subsidy and therefore failing to make claims or claim certain projects under the R&D Expenditure Credit (RDEC) scheme.
- Unclear and obscured project write ups.
- Special rules being applied to connected parties or staff that should be considered as Externally Provided Workers (EPWs).
Best practices for avoiding a negative audit outcome include:
- Engage an R&D tax specialist when compiling your claim (even just for a review) or, should an enquiry arise, to ensure you have the expert advice to increase the likelihood of success.
- Keep and maintain R&D records, whilst there is no requirement this could be the difference between a successful and unsuccessful audit. This could include R&D timesheet data to subcontractor contracts and invoices.
- Spend some time either working with a specialist or your internal subject matter experts to write a clear and concise technical report summary for HMRC. Whilst the low fees offered by R&D tax providers relying heavily on AI are tempting, the use of report writing tools often over-generalise the projects which can increase audit risk.
The R&D incentives in the UK are undoubtedly still very generous in terms of criteria for eligibility and eligible costs and are still seen as a crucial tool for UK-based companies to utilise as part of the innovation ecosystem.
Now, more than ever, a reminder by HMRC that claiming R&D tax relief should in no way be a routine part of a company’s tax calculation, and thorough analysis of eligibility and expenditure needs to be considered and justified year on year.
Our CTI International team, based in the UK, can answer any of your questions around your R&D tax relief claims. Contact us today.