R&D Tax Credits are well and truly under the microscope this year with the biggest shake up since they were introduced over 20 years ago in the pipeline. SME rate cuts announced in the Chancellor’s Autumn Statement are due to take effect from April along with the introduction of several other changes that were previously announced.
SMEs need to be fully aware of what’s coming so they can assess the impact it will have on the future funding of their R&D activities and understand what adjustments need to be made to their claim process to ensure they remain compliant.
Impending cuts to SME funding
With a significant reduction in the rates of relief that SMEs will be able to claim going forward, innovative companies will see less funding available for their R&D projects.
The decision to reduce the SME benefit was taken in response to increased levels of error and fraud in the SME scheme. There has been much objection to these impending reductions which, whilst limiting the potential profit to any unscrupulous firms, do not actually address the root of the problem and only seek to penalise the majority of legitimate claimants.
The reality for SMEs is that for qualifying R&D activities undertaken from April 2023 onwards, the rate of R&D tax relief they can claim will be reduced from 130% to 86% whilst the SME credit rate will decrease from 14.5% to 10%.
In contrast, rates in the RDEC scheme are to be increased from 13% to 20%.
Are you claiming for all your eligible activities?
Whether you handle R&D Tax claims in-house or outsource them to a third party, now is a pertinent time to check they cover all your eligible activities and costs. R&D Funding Group regularly engages new clients who were previously under-claiming because they were either doing the claim work themselves or using a non-specialist accountant or inexperienced advisor.
On the flip side, there are also companies that have been caught out by HMRC by submitting inflated claims. Whether intentional or not, over-claiming has contributed to the error and fraud statistics that have resulted in R&D Tax Credits being put under the microscope. A huge clamp down, also announced in the Autumn Statement, has lead to enhanced measures being put in place in a bid to stamp out abuse of the schemes.
In a positive move, from April, the scope of qualifying expenditure is being extended to include pure maths and cloud computing. Companies whose R&D activities involve these elements need to familiarise themselves with the rules surrounding this so they can attribute the relevant cost components to their claims.
Enhanced measures to tackle abuse of R&D Tax Credits in 2023
HMRC’s specialist R&D team focused on SME compliance has more than doubled in recent years and many of the changes being introduced specifically relate to the targeting of error and fraud in line with this.
Claims are now being subjected to close scrutiny and HMRC are challenging businesses to substantiate them in greater detail to prove they do actually qualify. From April 2023, all claims must be made digitally and include supporting documentation, providing specific details of the R&D claimed for and a breakdown of the expenditure incurred. These new measures are being introduced to allow HMRC to risk assess more easily.
A key problem with this however, is that the HMRC staff dealing with claims are not technical specialists and therefore don’t have the same knowledge as the industry professionals within the claimant organisations who have carried out the R&D work. Even if you are confident your activities qualify, it’s essential any R&D advisor you work with is ready and able to fully defend your claim in the event of a query, demonstrating to HMRC without doubt that the work claimed for is eligible.
In a bid to prevent unauthorised agents submitting claims on behalf of a company without their knowledge, all claims will also require support by a named officer of the claimant company. Similarly, full details must be provided for any agent that is associated with a claim; allowing HMRC to monitor those that have a history of submitting spurious claims. In addition, first time claimants will be required to pre-notify HMRC of their intention to submit a claim. The latter aims to prevent agents from submitting claims for existing clients for earlier years when they didn’t qualify. It will also flag up potential claims from businesses in industries that don’t usually claim, allowing HMRC to provide education and prevent non-qualifying claims from being submitted.
Businesses outsourcing their R&D Tax Credits claim work to third parties ultimately have liability for the claims submitted so it’s essential to work with an advisor whose people have the necessary skills and experience to accurately prepare claims that are maximised but also strictly HMRC compliant.
Proposal to merge SME and RDEC schemes in 2024
Cuts to the SME rates are the first step towards the introduction of a single R&D Tax Credits scheme for all, which would replace the existing RDEC and SME schemes if it goes ahead. A government consultation on the design of a single scheme is currently underway.
Once the consultation period has ended and responses have been reviewed, if the government decides to forge ahead with a single scheme, no further consultation will take place and the new scheme would be applicable to all R&D activities conducted from April 2024.
What can SMEs do?
Tell your MP how SME R&D rate cuts will affect your business
The government doesn’t believe there will be a reduction in innovation as a result of the SME rate cut but if you know it will negatively impact your business and that R&D will be affected, make sure you tell them about it. You can contact your local MP directly via Write to Them or you can find contact details on the UK Parliament website.
Respond to the Consultation on the design of a single scheme
All those involved with R&D tax credits whether as a claimant company, accountant or R&D advisor, are invited to submit their views before the deadline of March 13th 2023.
Full details of the consultation and how to respond can be accessed on the government website here.
Ensure your claims are HMRC compliant
As with all tax matters, compliance is key when preparing a claim for R&D Tax Credits. Reputable R&D advisors have always advocated this and will only ever claim for qualifying activities and costs.
However, there are some companies and less meticulous advisors who have in the past submitted claims they were unsure of in the hope they might qualify or slip through the net. The new measures combined with HMRCs enhanced checks aim put an end to these practices.
When it comes to identifying qualifying activities, there can be grey areas, and this is where engaging the services of an experienced advisor can really add value. Specialist R&D tax advisors are able to accurately identify and qualify all eligible activities to ensure businesses receive the full tax relief or credit they are eligible for whilst remaining strictly HMRC compliant.
It is of course essential to do some due diligence before engaging an advisor to check they are time-served in the field and have the necessary skills and experience. Too many businesses have been caught out by inexperienced agents trying to exploit the system and it’s hoped that HMRCs new measures will also help to weed them out.
Don’t miss out due to complacency
Most companies that are successfully claiming R&D Tax Credits will probably say they are happy with their current R&D tax advisor. If everything runs smoothly and they receive a tax deduction or a payable tax credit every year then they likely have no problems with the process and don’t feel the need to consider alternative service providers.
If you’re working with a long-established, reputable company with time-served technical specialists, the chances are you are claiming everything you’re eligible for. However, not all R&D tax advisors are the same and there have been many new entrants to the market in recent years who simply don’t have the skill and experience level to accurately claim for all eligible activities. Similarly, there are now many online services claiming to do the job of an R&D advisor for a fraction of the cost which in reality cannot provide the detailed claim work that is now required to pass HMRC’s enhanced checks. It simply isn’t financially viable for them to do this at the rates they charge.
So, even if you are satisfied with your current advisors, it’s always worth undertaking a regular review to check you are getting the best value and that your claims cover the full extent of your eligible activities and costs.
R&D Funding Group offers a free R&D Tax Credits consultation for any existing claimants wanting to review their current situation or for businesses looking at claiming for the first time.