The government introduced the Advance Assurance scheme two years ago in a bid to provide businesses with greater visibility and certainty on research and development (R&D) tax relief claims.
However, the scheme received a lukewarm response with HMRC confirming it received only 200 applications during its first 10 months.
Advance Assurance is available for micro-SMEs with fewer than 50 employees and turnover under £2m, with the caveat that they must not have applied for R&D relief before. The trouble is, few businesses, especially smaller ones, set out with R&D in mind. Most implement it once a project develops. Even for those who undertake R&D from the start, it’s hard for them to know what they’ll be working on in the future, unless perhaps they’ve been set up to develop a specific asset. This means the scheme is restricted to those companies that would actually benefit the least from it.
But target audience isn’t the only factor at play. Although claiming businesses don’t need to submit a full report, HMRC still requires evidence of R&D activities. This increases the administrative burden for applicants – something smaller business can’t afford, especially if they need to hire a specialist.
While the number of R&D claims submitted nearly doubled between 2011/12 and 2014/15, general awareness of the scheme is low. Most companies are learning about R&D tax relief after they’ve already conducted R&D.
As a result, their first foray into R&D tax is to submit a retrospective claim, which instantly blocks them from going down the Advance Assurance route. If HMRC genuinely wants to significantly increase uptake, they should remove claiming history restrictions.
Lessons from around the world
Interestingly, similar initiatives have been implemented in other countries, but in completely different ways. In South Africa, it’s compulsory to register every eligible project with the Department of Science and Technology before the accounting period starts. Only expenditure incurred after applications is eligible. This makes planning for ‘on the job’ projects incredibly difficult to predict.
Australia is different again: It runs an optional scheme whereby a company – regardless of size or claiming history – can apply for project pre-approval via the Australian Tax Office. Unlike our scheme, businesses are given a binding decision on the eligibility of their projects, providing they’ve registered the project before the end of an accounting period and they stick to the nature of the work detailed in their advance finding. However, Australia does require every project to be registered within 10 months of the year-end.
Although the requirement to register every project can be a huge burden, especially for companies carrying out hundreds of projects every year, there’s one lesson I encourage HMRC to take from our Australian counterparts: Extend the scope to include companies of all sizes.
In its current incarnation, Advance Assurance isn’t fit for purpose. While the intention behind it is clear, its implementation hasn’t enticed businesses to utilise the initiative. While extending the scope would increase the strain on an already overstretched and under resourced HMRC, unless steps are taken to develop Advance Assurance into a useful tool for businesses it will continue to be one that is very seldom used.
In the recent budget, Philip Hammond stated his intention to implement measures to reduce the administrative burden of submitting R&D claims and that our scheme was “globally competitive”. With that in mind, now is the time to take some of these valuable global lessons on board and enhance the current scheme, so that it caters for all businesses – giving less guidance and greater visibility with genuine assurance for UK companies planning to undertake R&D.
About Adam Spriggs
Adam Spriggs is a Senior R&D Tax Manager at Ayming, and a Chartered Tax Advisor (CTA). His career history includes time at a range of accounting firms, including Grant Thornton.