The first R&D relief scheme was launched back in 2000 for SME’s. It took two further years before a larger company R&D scheme was launched. The scheme was underused for many years and HM Revenue and Customs (HMRC) were relaxed in processing the claims. HMRC enquiries only really happened in quite extreme cases. However, HMRC’s new approach to R&D has changed things for the small business.
The previous approach encouraged a raft of so-called R&D specialist firms to start up with fees based on a percentage of the tax refunded. Eventually, this led to organised criminals also abusing the scheme which then led to the repayments relating to R&D being frozen in 2022 for around 6 months. Clearly change was needed!
Merging the schemes
In Budget 2023, the chancellor announced a raft of changes to the two R&D schemes in operation. He went further, saying the plan was to merge the two schemes. This happened for accounting periods after 1 April 2024 and coincided with HMRC’s new approach to R&D.
Removal of the SME scheme
Due to the SME scheme being more widely abused, the new merged scheme is in line with the larger company, RDEC scheme. This is perhaps unsurprising as the relief and potential tax refunds were significantly greater under the SME scheme!
The changes made in April 2023 and 2024 have led to a significant reduction in the tax reductions or refunds available for R&D claims for SME’s. However, there has been a slight increase for large companies.
R&D Intensive Support
The 2024 changes have also greatly restricted who can apply the SME type relief which has been renamed R&D intensive support. From 1 April 2024 companies will not only need to loss making and meet the normal SME thresholds in relation to turnover, net assets and employees, they will need to spend at least 30% of their profit and loss expenditure on qualifying R&D.
This means most companies are unlikely to be able to use this scheme. Most SMEs now claim under the R&D Expenditure Credit (RDEC) scheme, albeit with lower levels of credit.
Increased disclosure to HMRC
Companies now have had to notify HMRC of an intention to claim R&D relief within 6 months after the relevant accounting period. They also must complete an electronic Additional Information Form on HMRC’s system which includes:
- The company’s details including the company’s UTR, PAYE scheme number and VAT registration number,
- The contact details for an individual within the company who takes responsibility for the claim,
- Details of any agent who assisted with the claim,
- Breakdown of the total costs included in the claims,
- Number of projects included in the claim,
If you are claiming for 1-3 projects, you will need to provide the details below for each project. For 4 or more projects the details of the lowers of projects covering 50% of the total claimed expenditure (with a minimum of 3 projects) or the10 largest projects, by qualifying expenditure, are required.
The details required for each project are:
- The main field of science of technology the project relates to,
- The base line knowledge you planned to advance,
- The advancement sort by the project,
- The uncertainties faced,
- How you sought to overcome these uncertainties.
- Qualifying expenditure for the project
This Additional Information Form needs to be submitted before the corporation tax return which includes the claim is filed, to avoid HMRC automatically rejecting the claim without even looking at it.
HMRC’s new approach
The approach to approving R&D claims has also completely changed as there is much more scrutiny from HMRC. Unsurprisingly, we are seeing a significant number of enquiries into R&D claims now, around 1 in 5 claims being enquired into.
This was inevitable due to the problem uncovered in 2022 and welcome, however, the enquiries do seem to be indiscriminate.
From one extreme to another but we can help you
During past enquires, HMRC inspectors were willing to collaborate with agents to determine the accurate claims and resolve the inquiry.
In the last year though the industry is seeing very little discussion with HMRC before they reject the claim is using blunt statements covering as many reasons as possible.
This is scaring off valid claims and so the professional bodies are now engaging with HMRC to try to clam their approach.
Competent professionals – HMRC’s view
HMRC is now taking a very stringent approach to who they see as competent professionals. They believe a competent professional needs to have qualifications. Just having years of experience in an industry will not necessarily be accepted by them.
It is important to show a competent professional established the scientific or technological uncertainties exist within the project and that a solution to these could not be readily deduced.
One positive change
The one positive change is there are no longer any restrictions over companies claiming subsidised expenditure.
Under the old rules government grants or customer payments for the R&D work would be as subsidising the expenditure. Subsidised expenditure did not qualify for either R&D schemes.
Is it worth claiming R&D relief now?
Unfortunately, HMRC’s new approach will be scaring off legitimate claims and the payback for the increased work involved in making the claim has now significantly reduced for SME’s.
However, if companies do have a qualified competent professional and have enough qualifying expenditure on a qualifying project, the scheme is still worth considering.
Companies considering making a claim would benefit from the support of a genuine R&D specialist, so do seek help but make sure you check out their credentials first! There are several good firms out there, like Myers Clark who can help.
Don’t hesitate to get in touch with our expert Ian Meaburn at ian.meaburn@myersclark.co.uk who will be happy to help work out if you have a genuinely qualifying project and if it will be worthwhile making the claim.