UK R&D tax relief enables companies undertaking innovative activities and qualifying R&D projects to claim corporation tax relief and/or tax credits on qualifying R&D expenditure.
The purpose being to encourage UK innovation by providing relief on qualifying R&D spend, effectively derisking the cost of the R&D work for qualifying companies. This has enabled companies to invest in vital R&D that aims to achieve scientific and/or technological advancements, which typically leads to additional employment and increased expertise in the UK. It is universally recognised that without innovation in business, economies will not grow, therefore a reduction in R&D tax relief and discouraging valid companies from claiming may result in the UK falling behind other major world economies.
R&D tax relief has been in existence for more than 20 years, however over the last couple of years there have been monumental changes, including a significant increase in HMRC enquiries. Over the life of the R&D schemes, the number of companies claiming R&D tax relief has increased exponentially, partly because companies and their advisors have become more experienced and adept at identifying qualifying R&D activities but also because some companies, often misled by rogue R&D advisors have pushed the boundaries of the legislation, leading to exaggerated and fraudulent claims being filed.
Historically, HMRC’s enquiry rate was 1% and the vast majority of R&D claims were processed with no or few questions asked. This all changed a couple of years ago with the introduction of the HMRC R&D ISBC enquiry team. It was widely accepted in the accounting and tax profession that change was needed to tackle inflated and fraudulent R&D claims, however, the resulting consequences of HMRC’s sledgehammer approach to enquiries, along with the changes in legislation reducing the amount of relief available, has had a disastrous impact to genuine claimants and has the potential to cripple the UK’s economy and innovation.
The ISBC unit was primarily made up of newly trained and inexperienced R&D staff and although the enquiry process quite rightly sought to target companies who were making overinflated and fraudulent claims, HMRC’s volume approach to enquiries has also targeted genuine qualifying companies, who have been caught up in long drawn out enquiries, where in some cases, HMRC has ignored evidence and denied companies the opportunity to discuss the R&D claim in person, instead adopting a tunnel vision approach to deny genuine qualifying companies this vital tax relief.
Across other HMRC taxes, when enquiries are opened, there is usually a named HMRC caseworker/Inspector, allowing a level of understanding, direct contact and collaboration between taxpayers, advisors and HMRC to ensure the correct amount of tax is paid, which has enabled fairness and trust in the enquiry process, very much in line with the taxpayer’s charter. Unfortunately, this is not the case with the ISBC unit as no names are provided as to the HMRC staff conducting the enquiries, reducing accountability and recourse when serious errors have been made.
The accounting/tax profession and their professional bodies have understandably been up in arms about HMRC’s failings and the adverse ramifications it is having on companies genuinely undertaking qualifying R&D. Some companies have been pushed into serious financial difficulties and many have thrown in the towel, deciding not to contest HMRC’s decision to disallow their claim, as they do not have the resources to fight against the might of HMRC. Companies do have the choice to appeal against HMRC’s decisions at a tax tribunal, but to do this requires significant cost and time which many companies simply cannot afford, particularly start-ups.
It is easy to overlook the significant and cumulative adverse effect that a lack of investment in innovation by businesses is likely to have on the UK economy in the future. With thousands of legitimate R&D qualifying companies experiencing an unjust and unfair enquiry process, and the adverse consequences this has brought, many have had no choice but to reduce resources spent on innovating or stop innovating completely. Whilst tax takings from HMRC denying legitimate claims may appear to increase in the short term, the long-term adverse effect on growth in the economy and associated tax takings could be devastating, with ramifications across all industries and supply chains.
The Chartered Institute of Tax (CIOT) has written comprehensive open complaint letters to HMRC regarding the serious failings occurring in the current R&D enquiry process. However, despite HMRC recognising its lack of training and that serious errors have been made, not enough is being done to address HMRC’s failings, or deal with unscrupulous R&D advisors.
The reduction in tax relief available, the increased costs required to support R&D claims, combined with the increased risk of HMRC denying genuine qualifying companies R&D tax relief has significantly deterred companies from investing in innovation, creating a perfect storm and a potentially disastrous effect on growth in the economy moving forward.
It is now more important than ever that genuine R&D claimants ensure they are working with experienced, creditable R&D tax advisors. Collaborating with their advisors throughout the year to develop their R&D strategy, understanding the complexities of the R&D schemes and the increased requirements and capturing evidence in ‘real time’ is now essential, to support their R&D claims and mitigate the risk of an enquiry. Gone are the days of a ‘light touch’ approach at the end of the accounting year, it is vital companies choose the right R&D advisors and challenge the advice they are given. If something seems too good to be true, it often is. But with the right advisors, expert advice and a robust R&D strategy, companies can navigate through the complexities of the R&D schemes to ensure if HMRC do enquire, their claims stand up to this intense and rigorous scrutiny. This in turn should help restore a level of confidence to the R&D tax relief schemes and encourage the innovation and growth the UK economy needs.
