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image of magnifying glass held up to building | accountingweb | HMRC challenges 2/3 of R&D claims for media companies: what’s going on here?
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HMRC disputes 66% of R&D claims by media companies

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A significant increase in the number of research and development relief claims has led HMRC to investigate just how much actual R&D is going on, with media companies coming in for particular scrutiny.

19th Jun 2024
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Over the past 10 years, there has been a significant increase in the number of companies claiming research and development (R&D) tax relief. More than 90,000 claims were made in the year ending 2022 – twice as many as there were in 2016. 

This increase has led to uncomfortable questions – is it likely that so many more companies are now genuinely carrying out R&D? Or is it simply that more companies are rebadging work as R&D in order to get money from HMRC?

HMRC’s research suggested the latter and they gradually adopted a “volume-based” approach to policing the scheme. This included challenging claims from specific sectors, focusing on those with high rates of non-compliance, such as care homes, wholesalers and retailers.

More recently, it appears that HMRC is extending this approach. A recent article by RSM UK cites that four out of 10 media businesses have made claims for R&D tax relief and that two-thirds of these were challenged by HMRC in the past 12 months. The question is – is HMRC being particularly heavy-handed with media businesses, or is their stance justified?

Blurred lines

To answer this, let’s go back to the requirements of the R&D scheme. These make very clear that the R&D scheme is there to provide tax relief for technological innovation, but only when certain conditions are met. 

Problems immediately start to creep in when companies assume their work qualifies for relief whenever they develop something new or try to solve complex problems without obvious answers – even when there’s no advance in technology in sight. For example, a new product may indeed be better or different than its competitors, but it won’t qualify unless the company made an overall advance in a field of science or technology as part of developing that product. 

The thing is, most businesses don’t set out to advance technology. Instead, they develop improved products by using, optimising or refining existing technology. In other words, they typically use technology to innovate, rather than developing new technology.

Unfortunately, the lines of what is deemed to be R&D have been blurred over many years by optimistic claimants and little oversight from HMRC.

Media companies and R&D

In the main, media companies are in the business of producing and distributing engaging content. While technology is certainly involved in that process, again, most companies in this space will be using technology rather than developing more advanced technology themselves.

This even holds true when they’re commissioning IT specialists to build them new software systems. In many cases, those specialists are able to do so using entirely standard software development tools and environments. From HMRC’s perspective, the risk is commercial rather than technological; the work just doesn’t line up with HMRC’s definition of R&D.

The recent first tier tribunal regarding Flame Tree Publishing is a good example of this. The project represented something new in the publishing industry, but there was no evidence to support an advance in a relevant field of science or technology – in this case, computer science.

This advance in a recognised field of science or technology is crucial to the validity of an R&D claim. Given the nature of their business and who they employ, we suspect that the great majority of media companies would find it difficult to talk in any great detail about the underlying science involved in any work they’d done themselves or subcontracted to specialists.

So, this brings us back to our earlier question: is HMRC justified in questioning the majority of claims from media businesses for R&D tax relief?

The right approach

While there has been a huge amount of coverage recently about how HMRC is cracking down on R&D tax relief, they’re not always wrong to do so. In this case, it seems likely that HMRC has concentrated on media companies because it’s discovered that the majority of those claims have been made for work that doesn’t qualify.

Also, while RSM’s article refers to 24% of R&D claims being “approved by HMRC without challenge”, the reality is that HMRC does not “approve” claims, it merely processes them (and reserves the right to ask questions later). This means that each of the media companies sitting on a “successful” R&D claim might be celebrating prematurely – and have to pay the money back later, with interest.

Tricky position

R&D advisers are in a tricky position as HMRC starts to enforce higher standards of compliance. They are the ones who need to set (or re-set) client expectations about HMRC’s definition of R&D and how it applies to their work. 

While HMRC will no doubt be continuing with its hardline approach for some time, advisers can help their clients stay ahead of this by ensuring that their knowledge is bang up to date and that their clients’ claims are carefully and conservatively prepared.

Replies (12)

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By Justin Bryant
19th Jun 2024 13:43

This R&D tax credit malarkey is where a lot of the tax gap is. We've all been saying that here for years. Yet look here at how HMRC prefers to spend its precious resources: https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-went-to-tribunal-ov...

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By carnmores
19th Jun 2024 14:17

most of them are at it! Justin is correct but all this is likely recoverable where other gaps will not be

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By taxwizard
19th Jun 2024 14:24

Its easy makeup a spurious claim for R&D and make losses and claim the refund.

No checks. If it is checked then the company will be closed down.

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By ireallyshouldknowthisbut
19th Jun 2024 14:47

Im surprised only 2/3rd are bent for media companies

Id have thought it was more like 99%.

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Replying to ireallyshouldknowthisbut:
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By Open all hours
19th Jun 2024 19:19

Absolutely agree. 66% seems like a ridiculously low figure. Maybe it’s a typo and you’re right to spin the digits.

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By Paul Crowley
19th Jun 2024 16:01

At long last HMRC are dipping a toe in the water. I think they should be actively scrutinising every claim made.
Should not be a problem if the R&D companies are doing it correctly, but it would appear they are not.

What they should really be doing is looking at the agents that submit failed claims and looking at all claims submitted by those firms.

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Replying to Paul Crowley:
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By Justin Bryant
19th Jun 2024 16:55

Are you some kind of mad, crazy, drug-addled fool? That is far, far too simple and sensible a suggestion for HMRC to adopt!

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Replying to Justin Bryant:
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By FactChecker
19th Jun 2024 18:42

And it would create *more* work for HMRC (to fall behind in processing) ... the very antithesis of the Harra culture (aka 'less work, more revenue, everything digital')!

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By unclejoe
20th Jun 2024 09:24

I believe that the whole system is widely abused. A a simple online search shows numerous firms that will help you make a claim (for a fee) and they imply that almost any "new product" will qualify. I have done some research on the governments Innovate UK scheme which gives direct grants for innovation. There the grants are made public, at least in single sentence summary. That is also abused in my experience. Some companies have received numerous significant grants but never had any significant products make it to sales, with the money being spent on bloated director salaries, until the company folds. Tax relief is no different is in principle - it is all OUR money that the government is spending. If companies had to account publicly for their claims it would weed out the frauds. And if they don't want people to know what they are spending it on they don't have to claim.

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Replying to unclejoe:
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By rememberscarborough
20th Jun 2024 09:51

When you say the whole system is being abused I'm assuming you mean the whole tax system and not just R&D claims and you'd be right!! Just look at the likes of Google, Amazon etc who are clearly making profits out of UK taxpayers yet claim to be trading from elsewhere.

The whole system isn't fit for purpose and it's time we looked at the substance of the transaction rather than the "rules" that are made by the people wanting to avoid (evade?) tax....

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Replying to rememberscarborough:
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By moneymanager
21st Jun 2024 09:50

Costa used to be owned by Whitbread and paid substantial Corp tax, on a similar turnover Starbucks paid virtually nothing, the latter is owned by Bill Gates while the former is now owned by Coca Cola and, I dare say, pays nothing either; I wonder who pays for the physical infrastructure they use and the welfare costs of employees?

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By moneymanager
21st Jun 2024 09:38

On one hand PWC advises government on such matters, on the other hand it has specialist units marketing reclaim services, hands in the cookie jar and paid every time.

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