R&D Tax Credits (RDTCs) are nothing new. They have been available to innovative UK companies who serve as pioneers within their sector, developing new products that challenge scientific boundaries and processes that enhance customer outcomes for over 20 years.
However, when Jeremy Hunt delivered his autumn statement November 17th, he effectively confirmed the sea change in HMRC’s attitude towards claimants and their advisors.
The rate of relief for research and development expenditure credit (RDEC) will increase from 13% to 20% for expenditure incurred on or after 1 April 2023 – effectively a 50% cash boost to claimants.
RDEC is applicable to large companies who meet certain criteria as defined in the legislation, but which principally requires them or the group of companies to which they belong having an annual revenue of more than €100,000. Conversely, the additional deduction for claims within the small and medium sized enterprise (SME) Scheme was cut from 130% to 86% with the amount of tax credit reduced from 14.5% to 10% – effectively a 60% cut.
This simply confirmed what those of us closest to the HMRC’s policy unit on RDTCs already knew – resources are to be directed to those businesses that have demonstrated the most effective reinvestment of RDTC proceeds in the future growth of their business i.e., large companies.
This sea change in attitude, not just legislation, means the risk of a poorly presented R&DTC claim leading to a tax enquiry and investigation that proves inconvenient and costly (even where no wrongdoing is found) has never been greater.
There is a major HMRC crackdown underway to stamp out poorly evidenced and/or bogus claims from companies and their “advisors.” The term “advisors” is used loosely, as many organisations find themselves “advised” by either: –
- Accountants focussed on picking the “low-hanging fruit” – i.e., easily identified R&D costs that require minimal work or understanding of a business/industry to identify.
A lack of true industry/sector experience and genuine R&DTC expertise combine to mean that huge swathes of genuine qualifying R&D costs are omitted – and therefore claims are much smaller than they should legitimately be.
- Cowboys/sharks/charlatans (take your pick!) who take advantage of the non-regulated environment and a previously “slack” HMRC policing policy to submit poorly evidenced, often grossly exaggerated R&DTC claims.
In the past, many such claims have sailed through the HMRC R&DTC team who, with limited resources, were tasked with settling claims within 28 days of submission leading to a “self-assessment” attitude to review. “Advisors” commonly played the percentages, knowing that HMRC’s team took no more than a cursory glance at 99% of claims – so why bother investing time really understanding the R&D in a business and providing detailed, highly technical reports to accompany the computations?
Failure to do so now however is to play a dangerous game of Russian roulette with not only a company’s Balance Sheet but its reputation.
The HMRC bar has been raised – with SME’s now facing significantly greater scrutiny and risk…. far more closely aligned to the “RDEC” environment.
And here the news for genuinely innovative pioneering businesses gets even worse!
Advisors – including the “Top 4” accounting/audit firms – have always been extremely reticent to advise most of their RDEC clients into submitting R&DTC claims for two principal reasons: –
- They do not have the genuine sector/industry experience in specialist areas such as manufacturing, engineering, construction, agrifood, IT and software, life science, medical products/application etc. to provide highly technical reports that are required by the RDEC regime to support R&DTC computations that HMRC require.
Given the autumn statement has made the relief 50% more attractive to claimants, it is an absolute certainty that HMRC’s “bar will be raised” accordingly to ensure that only robust, technically and scientifically proficient claims will be passed without enquiry – making the accounting firms even more reluctant to venture into the RDEC world.
- To fully identify and understand what innovation is going on within the depths of an organisation requires many man hours of investigation, probing and questioning on the part of the advisor….and there is no certainty that they will conclude the organisation has any qualifying expense (beyond the obvious low-hanging fruit). The typical “on the clock” charging structure of the large accounting firms means there is a real risk that the professional fees arising from the activity erode or indeed exceed the marginal benefit of the R&DTC claim. This leads to unhappy, already very lucrative audit and corporation tax clients for the accounting firm – so the risk: reward equation leads them to steer their clients away from R&DTCs altogether.
Despite the challenges, R&D tax credits remain an invaluable but under-utilised growth tool for businesses committed to being pioneers in their industry – especially businesses that qualify under the RDEC scheme.
If UK plc is to grow its way out of recession, it is going to be led by those companies who are genuinely committed to investing in growth through innovation. The autumn statement confirms government’s commitment to supporting innovation through R&DTCs, so there has never been a better time for genuinely innovative businesses to benefit from high-quality R&D tax credit advice.
At ERA, “value through insight” is what we do…. working with a small panel of like-minded specialist R&D advisors who not only exhibit the highest ethical standards, but possess within their teams, the sector expertise required to prepare and articulate R&DTC claims to HMRC accompanied by detailed technical reports.
This can only be achieved by investing time in fully understanding a business. This means looking beyond the finance team and, where applicable, even the R&D team to fully understand the daily operations of a business so the challenges faced in developing products and processes, over-coming problems and technical barriers, reducing waste and improving efficiency can be identified, understood and assessed to establish whether they represent qualifying R&D activities as defined in the applicable legislation.
Whether your business has never submitted an R&D tax credit claim and seeks advice as to whether you qualify or has been claiming for many years but would like a free review of recent claims, please contact your regular ERA consultant or register your interest at here.