The unintended consequences of HMRC’s tough new line on R&D tax relief
HMRC's more aggressive approach to R&D tax relief has caused concern among those within the industry, but can we expect it to stay this way?
HMRC really kicked up a gear towards the end of 2022. From November onwards, accountants and R&D specialists began to notice a new and worrying trend. HMRC was suddenly being far more aggressive in deciding what was – and what was not – R&D.
Nearly a year later and there are clear problems and unintended consequences emerging as a direct result of HMRC’s no-holds-barred approach to R&D compliance.
For example, any SME who has recently been through an R&D enquiry will appreciate just how soul-sapping that experience can be. While HMRC is right to be applying more scrutiny to claims, the issue is that the way they’re doing it is so dogged and one-sided that it’s turning SMEs away from the scheme.
It's true, there are undoubtedly many SMEs claiming who likely shouldn’t have been, but the issue is also affecting SMEs in strong sectors like pharma, medical devices and engineering. For some, it’s simply not worth the stress and they’re deciding to try to meet their development objectives without applying for R&D tax relief.
Other companies, those that are better resourced or more mobile, are looking across the sea to Ireland, which recently announced that it was increasing its R&D tax credit from 25% to 30%. Given that the Government and HMRC seem to be creating a hostile environment for SMEs involved in R&D in the UK, it may only be matter of time before start-up teams decide that it’s better to incorporate in Ireland instead. Given that one of the aims of the R&D tax relief was to encourage technology companies to set up in the UK, it’s disheartening that SMEs are now looking enviously abroad and reconsidering their options.
Linked to the problems faced by SME applicants, R&D specialists and accountants have noticed a marked downturn in business. Firms accustomed to processing around 100 R&D claims a year have told us privately that they expected that number to drop to around half, driven by more conservative risk management and clients fearful of protracted enquiries. Some advisors have even chosen to close their R&D services entirely, concentrating their efforts in other, less-uncertain areas.
HMRC’s dramatic change in approach is completely reshaping the R&D tax relief landscape. While change was long-overdue, this probably wasn’t what people envisaged.
So, is all hope lost? We don’t think so.
The situation is so bad that it surely can’t continue for too much longer. The National Audit Office has been speaking to a wide range of stakeholders in R&D tax relief, with its report expected before the end of the year.
We hope that this reflects the situation on the ground, which is that SMEs with genuine claims are being subjected to the same treatment as those with much weaker claims to relief. It seems like HMRC has one approach that’s being applied indiscriminately to almost everyone with an enquiry. This is very much at odds with HMRC’s message that everything is running to plan and that tough love is just what’s required. The Autumn Statement should also bring more certainty about whether a new, unified scheme is to be introduced from 1st April 2024. The outcomes from these reports should give us a much clearer idea of what the scheme will look like going forward, and hopefully it is a more measured approach.
With so much going on in R&D tax relief it can feel hard to stay up-to-date. If you have clients who are concerned or confused about all the changes and what they mean, we produce a monthly digest of key things that are happening in R&D relief. We also have a library of free resources available on our website that you can use to reinforce your claim process and learn more about the scheme.
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