HMRC moves the goalposts for historical R&D claims

HMRC’s more aggressive approach to compliance in R&D tax relief claims doesn’t just affect claims submitted in 2023.

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It is also taking a hard look at claims submitted within the last two years, and it is retrospectively applying a higher standard than was expected at the time claims were originally made.

HMRC’s definition of R&D has barely changed since the scheme was created in 2000. Yes, it’s been expanded slightly to include advances in maths, but essentially HMRC’s view has always been that R&D for tax purposes is:

• Trying to achieve an advance in technology by
• Resolving technology uncertainty (where ‘uncertainty’ has a specific meaning of its own).

While the definition of R&D hasn’t changed (much), the way that HMRC is policing the R&D scheme most definitely has. As has been widely reported, HMRC is now applying a much higher level of scrutiny and is holding applicants to a much higher standard than it was doing historically.

The big problem for anyone preparing R&D claims is that you can’t do much to change the past. Prior to 2023, accountants and R&D specialists were preparing claims based on a certain understanding of what HMRC would “accept” (i.e. process without question). Given that enquiries used to be relatively infrequent, advisors could be forgiven for thinking “Well, if HMRC isn’t asking questions, my claims must be within acceptable boundaries”.

Unfortunately, HMRC is now asking a lot of questions – not just about recently submitted claims, but also about claims that were submitted up to two years ago (and in some cases is going even further back).

R&D advisors feel – with some justification – that their historical work is being judged against a new standard that should really only be applied to claims going forward.

On the other hand, HMRC would argue that the definition of R&D hasn’t substantially changed, and that the onus to get claims right has always been on the claimant company (and their adviser). In other words, “We just process them; it’s your job to make sure they’re right”.

HMRC raising the standard and applying it retrospectively has left some advisors wondering about what to do with claims they submitted in the past. Should they revise and resubmit them, or let sleeping dogs lie?

Prenotification of R&D claims 

This problem could be eased by the introduction of the prenotification requirements for R&D claims, which apply to accounting periods beginning on or after 1 April 2023. Your client must prenotify HMRC of their intention to claim R&D tax relief if:

• The company hasn’t claimed before, or
• The last R&D claim they made was (stay with me here) more than 3 years before the date that is 6 months after the end of the accounting period. (To make things easier, we developed an online calculator you can use to determine whether your client needs to prenotify.)

So how will prenotification help you and your clients?

Firstly, if HMRC opens an enquiry, the information underpinning the claim will be more recent and therefore easier for your client to evidence. Secondly, prenotification allows HMRC to engage with potential claimants before they make their claims. That means HMRC can allocate its compliance resources to the highest risk companies and sectors, which could mean fewer enquiries for your clients if they are in sectors that are more traditionally associated with R&D.

Staying current in R&D tax relief

Prenotification is just one of the changes introduced to the R&D scheme. Another big one was the introduction of HMRC’s Additional Information Form (AIF), which must be completed for ALL R&D claims submitted on or after 8th August 2023. 

By specifying the information that must be provided to support an R&D claim, and requiring the advisors involved in its preparation to be disclosed, HMRC has taken a big step towards making the R&D scheme more transparent and accountable. (If you’re interested in the AIF, we built a training course that takes you through it, step-by-step.) 

Other important changes are still on the horizon, with more detail about a new, unified R&D scheme expected to emerge at the Autumn Statement in November.

The point is – there’s a lot going on in R&D tax relief, and your clients will expect you to be up-to-speed on what these changes are and how they’re likely to affect them. To help you communicate all this to your clients, we publish a monthly review of what’s going on the R&D industry that’s packed full of tips, news and insights you won’t get elsewhere.