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Up until recently, the position of claims for Research and Development Tax Relief was a bit like the wild west. There were lots of specialist businesses cold calling companies promising guaranteed cash repayments. These businesses were safe in the knowledge that HMRC only checked a tiny proportion of claims and most likely they would get away, initially at least, with putting in exaggerated claims, thereby boosting their sales. This led to a large amount of potential fraud within the R&D tax relief system. Something needed to change.
However, in trying to root out the fraud and clamp down on unscrupulous claims companies, HMRC appear to have gone too far the other way. There are stories of sweeping assumptions being made about claims and inexperienced staff at HMRC taking an incorrect view on the R&D guidance.
Over the last 18 months, HMRC have put a significant amount of extra resources into looking closer at claims for R&D tax relief, especially those made by SME companies as it is widely regarded as this is the area where fraud is most prevalent. Unfortunately, this is squarely where almost all start-up technology companies sit. Therefore, your R&D claim is firmly on HMRC’s radar.
The new officers employed by HMRC specifically to look into R&D claims are inexperienced and, in some cases, do not appear to have an in-depth knowledge of the legislation and guidance. At times it can appear that the HMRC officers are using a ‘paint by numbers’ approach to their enquiries and if the claim doesn’t fit into a neatly defined box, it is rejected entirely.
The costs associated with dealing with tax enquiries can be substantial, as well as the time involved, with many enquiries lasting well over 12 months. This can be challenging to your business as it diverts your focus and efforts away from developing the company’s technology and growing your business.
However, it is not all doom and gloom! In order to minimise the risk associated with your company’s R&D claim, it is recommended that you utilise the services of an experienced and reputable tax adviser. They will take the time to discuss your company’s R&D activities with you and your technical team, fully review your costs incurred to ensure the claim is maximised while at the same time being fully compliant. An experienced adviser will also stand with you if the claim is selected for an enquiry, fighting your corner and taking away the stress and worry of dealing with HMRC.
As well as the increased scrutiny from HMRC into R&D claims, in the Autumn Statement delivered at the end of 2023, there was the seemingly obligatory annual change to the Research and Development Tax Relief regime.
This latest change however is the most significant to date, bringing the two, very different systems for tax relief into one merged scheme. This will have a substantial impact on many SME companies.
The changes take affect for accounting periods that start on or after 1 April 2024 and the new, merged scheme will broadly follow the existing large company, Research and Development expenditure credit (RDEC) scheme. Something many SME businesses will know little about.
Under the merged scheme companies will benefit from a 20% ‘above the line’ tax credit, this headline tax benefit seems positive, however the after tax, net rate of ranges from between 14.7% and 16.2% depending on the rate of Corporation Tax applying to the company. If a company is loss making it will benefit from the 16.2% post tax rate. This is a substantial reduction for many SME companies. Up until 31 March 2023, the net relief from R&D was 24.7% for profitable companies and 33.4% for loss making companies, who will effectively see their benefit from R&D tax relief cut in half.
Take, for example, a start up technology company who are pre-income and developing their product. If they generally spend £200,000 per year on qualifying R&D costs out of total costs of £1million, up until March 2023 they would have been eligible for a repayable tax credit of £66,800. That is cash, into their bank account to help fund the development costs. From April 2024, they will only benefit from enhanced tax relief of £32,400 and as they are not an ‘R&D intensive’ company, they will not be eligible for a cash repayment from HMRC.
Luckily, after much pressure from R&D companies, a repayable tax credit has been maintained, but only for those companies who spend at least 30% of their total costs on R&D eligible expenditure.
The objective of the newly merger R&D scheme is to make claiming tax relief simple with just one set of rules to follow for everyone, regardless of size. However, with so little time before the rules come into effect, businesses need to act quickly to ensure they are ready for the changes and factor the potential impact into their cashflow modelling and growth plans.
Any company who needs advice on the changes and the impact they will have on their business should contact the technology team at Scrutton Bland who will guide and support you through the changes. To get in touch with the team please call 0330 058 6559 or email hello@scruttonbland.co.uk
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