Research & Development tax reliefs – never getting any easier

by | Nov 23, 2023

The fiscal event favourite, R&D tax reliefs, produced further conundrums for businesses and advisers and, therefore, HMRC. The government’s Autumn Statement 2023 confirmed the planned changes to the two main R&D tax relief schemes, which will create a merged Research & Development Expenditure Credit (RDEC) scheme, applying to all businesses in accounting periods (APs) starting on or after 1st April 2024, alongside the scheme for ‘R&D-intensive’ SMEs.

This is presented as a delay for most businesses, depending on their individual APs, compared with the original plans to introduce the new arrangements for all expenditure incurred on or after 1st April 2024. This might reflect concerns voiced by several professional bodies, which were calling for a one-year delay to help advisers and their clients get ready for the changes. The other benefit of making the scheme apply to APs starting on or after 1st April 2024 is that it avoids the complication of expenditure in one accounting period straddling two different schemes. It should be noted, though, that for any business with an AP starting on 1st April 2024, the timing has not changed. Tax advisers will need to be fully ready to support claimant businesses with their planned activities in advance of April 2024.

The confirmed RDEC scheme will include a notional tax rate applied to loss makers, which is more beneficial than the original announcement in July 2023, ensuring a greater upfront cash benefit for loss-making businesses. This is likely to be welcomed.

However, despite all the noise about simplifying the schemes, the continuation of the more generous scheme for R&D-intensive SMEs results in the operation of two distinct schemes. Qualifying for the R&D-intensive scheme has been made easier, as the proportion of total expenditure on R&D activities threshold has been lowered from 40% to 30%. In addition, where any claim under the R&D-intensive scheme has been appropriate in one year, the company will be able to claim under the same scheme in the following year, even if R&D expenditure dips below 30%.

This threshold change is likely to be welcomed, with the government suggesting it will open up the more beneficial scheme to an additional 5,000 SMEs. However, the changes are yet more examples of tweaks being made to deal with specific situations, which result in additional complexity and incentives for behavioural changes in order to match circumstances to legislation. The obvious issues here are around the drive to try to get above the 30% threshold, potentially causing boundary pushing by businesses and advisers in a field that already has its fair share of this. It also risks behaviours which attempt to move spending between years, particularly as a business gets two years of the more generous scheme for meeting the threshold in a single year. There will also be uncertainty around whether a business will exceed the threshold until their accounts are drawn up at the year-end, as it is dependent both on R&D and total expenditure. And we’re told there is nothing more that businesses hate than uncertainty. Add in complexities around who qualifies for relief on contracted out expenditure, which will now depend entirely on the specifics of the contracts, and the new schemes appear to be just as complex as the original ones.

In addition to the new scheme from April 2024, there have been recent changes to the existing schemes that will continue to operate into the new schemes.

Businesses and advisers are still getting to grips with new administrative requirements brought in this summer for R&D claims. Current evidence suggests there are still many claims being submitted that do not include the required details. This indicates a need for much more work by HMRC to publicise and provide significant support around the new requirements. Unfortunately, well-publicised resource issues around R&D teams at HMRC suggests that this is unlikely.

The Autumn Statement announced that HMRC is going to be publishing a ‘compliance action plan’ in relation to R&D tax credits, but no timetable was provided. HMRC’s approach to compliance in this area is already being reported as a disincentive to businesses to even start claims for R&D relief in some cases, and we’ve been told of one business that moved its R&D out of the UK due to how enquiries into its claims were handled. R&D businesses and advisers are also just getting their heads around revised (non-statutory) guidance published by HMRC at the end of October around how claims should be made and supported. There is a risk that the practical difficulties in making and defending a claim outweigh the potential benefits and incentives to invest, for some genuine R&D businesses. In contrast, for cases pushed by rogue advisers, HMRC’s inability to deal properly with compliance cases means it might be worth a punt. There is one small positive relating to problem advisers: from today, R&D repayment claims will only be made directly to the company claiming, rather than to nominated advisers. This creates an early barrier to advisers receiving their ‘success’ fees, though it seems likely that contracts will be worded such that fee payments are due as soon as repayments are received, so companies are likely to pay over fees before HMRC gets around to raising any enquiries.

The latest attempts to simplify support for R&D investment, while discouraging abuse of the reliefs, seem to leave the rules as complex as they have ever been, and still create opportunities for exploitation. HMRC estimates it will cost over £11m for staff and IT to get the new schemes up and running. However, recent evidence indicates there is already a lack of appropriate levels of support and capable compliance resource within HMRC, and no additional funding is being provided. It looks like the world of R&D reliefs is going to be difficult and frustrating for some time to come.

There are much bigger questions about the effectiveness of the regime overall in supporting innovation in UK businesses – in particular whether there is additional R&D expenditure due to the existence of the reliefs. Given the updated forecast cost of the regime by the OBR is £42bn over the next five years, TaxWatch feels that a review of its value for money is overdue.

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