What are the changes in attitude to, and the clawback of, R&D claims by HMRC? Plus, what happens if a company enters Insolvency after making an R&D Claim?
The R&D tax relief system is designed to drive economic growth by encouraging investment in innovation. From April 2024, a new single merged Research and Development claims scheme came into force for most businesses. Both the existing and new schemes allow eligible companies to claim tax relief either via a reduction to corporation tax that would otherwise be due or, in certain circumstances, via a cash payment.
We are grateful to Helen Fraser, an Associate Director and Tax specialist from our friends at the Poole office of Azets, who explains in this article what the changes in attitude to, and the clawback of, R&D claims by HMRC are.
Why has HMRC changed its approach to R&D claims?
“HMRC have indeed increased the number of investigations they open into R&D claims. They take a strict view of the department for Business, Energy & Industrial Strategy’s guidelines – the meaning of R&D for tax purposes. Meaning of research and development for tax purposes: guidelines – GOV.UK (www.gov.uk) This has come about to tackle a large rise in erroneous and fraudulent claims being made, either by ‘pop-up’ boutique firms who are approaching and encouraging companies to make a claim or companies who are over-inflating their claims and taking it too far and abusing the system.
The bar has been set higher by HMRC
Procedurally, HMRC will pay over any refund or acknowledge the reduced corporation tax liability because of an R&D claim made on the Tax Return when it is filed and processed with HMRC. This does not mean that HMRC has ‘approved’ the claim. If there is to be an investigation opened, this could be up to 12 months from when the Tax Return was filed.
The onus is on the company to prove that the work being undertaken meets the definition of R&D and in particular, that the scientific or technological advance being sought is not already deducible in the market or could easily be achieved by a competent professional in the same field. Therefore, understanding the baseline knowledge of what already exists in the market is critical. Demonstrating that projects meet the qualifying criteria for R&D Tax Relief is complex when set against this high bar and requires expert advice. We expect that for the larger claims being argued with HMRC that we may see tribunal cases in due course.
The strict regime currently being enforced is affecting claims being made by SMEs which are valid and are likely to qualify for the relief, but where management do not have the resource or time to deal with an investigation raised by HMRC into a claim. This is resulting in many companies that qualify for the relief walking away from investigations for logistical reasons and losing out on a vital boost to cash flow to which they are entitled.
For claims post 8th August 2023, additional information is required
For R&D claims submitted on or after 8 August 2023, HMRC have introduced a requirement to complete an Additional information form. Without the completion and submission of this form, a Company’s R&D claim will be removed from its tax computations and CT600(L). This is normally submitted by the company itself or by the agent looking at the R&D claim. If the company has undertaken more than one project during the year, the narrative and costs will need to be split between the various projects. Per HMRC guidance, if the company is claiming for 1 to 3 projects, it would need to describe all the projects being claimed for, which cover 100% of the qualifying expenditure. If the company is claiming for 4 projects or more, it would need to describe the lower of (1) the number of projects that account for a minimum of 50% of the qualifying expenditure, subject to a minimum of 3 projects, and (2) 10 projects. If the qualifying expenditure is split across multiple smaller projects, it must describe the 10 with the most qualifying expenditure.
The Additional information form is separate to the Tax Return and must be submitted via an HMRC gateway and the narrative should cover what the baseline of technology is which exists before the advance, the scientific or technological advance being sought, what uncertainties existed in technical terms and what steps were undertaken to try and resolve these uncertainties.
What happens if Insolvency strikes?
A company may only make an R&D claim under the SME scheme if it is a going concern at the time of making the claim. This means that the latest company accounts are prepared on a going concern basis.
If a company ceases to be a going concern after a claim has been made, it is treated as if the claim was not made. This would include a company going into administration or liquidation. However, if any tax credit was given by HMRC before the company ceased to be a going concern, this is unaffected.
Each situation would need to be looked at separately and it should be based on the facts at the time, whether or not a company was a going concern.”
Talk to Helen at Fraser at Azets, Poole office, for help and advice on R&D Claims. Talk to us if you are worried about insolvency
As Helen’s article shows, R&D claims can be complex, so if you are looking at one and need help and advice, contact Helen direct, or get in touch with us and we will happily introduce you to her.
Of course, if your business is struggling financially and you are concerned you might be heading for insolvency then the sooner you contact us for advice the better.
Contact us or call one of our offices for an initial free of charge, confidential and no obligation discussion.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
