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R&D relief changes fail to help smaller businesses

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Small companies and their advisers are disappointed that the long-awaited detail on changes to the R&D tax relief schemes seem like another set of barriers to claiming, rather than making the process smoother.

5th Aug 2022
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On 20 July 2022 the government published draft legislation for the Finance Bill 2023, which included long-awaited detail on the upcoming changes to the R&D tax relief schemes. These changes focus on tackling abuse and increasing compliance within the scheme, and encouraging innovation to be carried out within the UK.

The publication of this legislation comes at a time when research and development (R&D) tax relief is in turmoil. HMRC announced in mid-May that they were pausing the paying out of R&D tax credits (RDTC) due to an increase in irregular claims being made and that this would have a knock-on effect on processing times for R&D tax relief claims. All well and good, only we now find ourselves two months down the line, and processing and pay-out times appear to be increasing.

Alongside this HMRC appear to have changed its enquiry process, with many claimants now receiving initial letters from the Fraud Investigation Service rather than HMRC’s R&D tax team.

In this atmosphere, the publication of the legislation has made claimants, providers and industry bodies feel like this is yet another set of barriers to claiming, especially for smaller companies and start-ups. Let’s take a look at the key changes that will detrimentally affect these companies.

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Replies (5)

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By Hugo Fair
05th Aug 2022 17:26

Sorry but this reads as a longwinded whine rather than an informed set of counter proposals or even justification of the moans.

1. Advanced notice of R&D tax claims - "this will catch out smaller and newer companies, who may not realise until they come to prepare their tax return that they are eligible to make a claim."
But the purpose of the scheme isn't to reward accidental & retrospective opportunity for the business (and their advisers) to make some 'free' money, it's meant to encourage planned investment in growth areas that would not have taken place without the inducement.

2. Overseas subcontractors - "many of these companies have been forced to use overseas development houses to expand their capacity."
Again, this misses the point of the UK scheme - which is not meant to provide subsidies that end up in overseas markets; you don't need to be protectionist to see that as a very poor investment.

3. Mandated R&D reports - "smaller SMEs are likely to have difficulties .. because their claim will be too small to be of interest to most R&D advisors."
Life is full of difficulties (especially where bureaucracy is involved), but the SME has to decide if the effort is worthwhile - just as they do with so many other operational decisions.

Not being big enough to feed the R&D advisers is NOT a problem except for those advisers ... which is where I came in!

Thanks (4)
Replying to Hugo Fair:
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By Dib
08th Aug 2022 13:29

I don't really agree with some of this.

1. The problem here is not about rewarding accidental & retrospective opportunity for the business (and their advisers) to make some 'free' money. It's a step change from the existing regime which will catch new startups in particular as well as existing companies starting R&D activities. The requirement that HMRC needs to be notified within 6 months of the end of the accounting period will mean that those companies (or their advisors) who are not on the ball and fail to meet the 6 month requirement will miss out on a year's worth of R&D relief.
It is also possible that the directors may not appoint an accountant until more than 6 months into the first year of activity. If the company has no employees and is still in the development phase so no sales activity that wouldn't be unreasonable Bear in mind that this deadline is 6 months shorter that the time limit for submitting the CT600 - why couldn't HMRC just align the two deadlines so that the company could notify on its CT return by ticking a box?! What benefit is it to HMRC to receive advance notice?

2. It is the case that sub-contracting overseas may be cheaper. This means the company minimises its costs which could be very handy. Also, the expenditure might go to line the overseas sub-contractor's pockets but what is wrong with that? HMRC doesn't mind when UK based banks pay £millions to their overseas parents to "line their pockets"! The fact is that the money spent by the UK company on sub-contract costs gives it a valuable asset in the form of the fruits of the R&D, which will hopefully allow HMRC to "line their pockets".

3. Fully agree here. A lot of R&D advisors (the ones who are ethical and don't necessarily charge entirely, or at all, on a contingent basis) have a variety of offerings to suit all pockets. Some firms offer a review service - client does the draft report, advisor discusses to get to the crux and cut out waffle and edits accordingly - for a small fee. Let's face it, a company carrying out R&D with even only £20k of qualifying expenditure will get tax relief of nearly £5k so paying an advisor £1k - £1.5k is feasible.

Perhaps the author should consider amending her intro "... has prepared hundreds of claims for companies of all shapes, sizes, colours and flavours." to include after "sizes" "provided they aren't small"!

Thanks (1)
Replying to Dib:
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By Hugo Fair
08th Aug 2022 14:20

Fair enough .. but we'll have to agree to disagree then (given that this platform doesn't really lend itself to hour-long discursive analysis)!

FWIW ...
1) You've missed my (intended to be) main point - that "it's meant to encourage planned investment in growth areas that would not have taken place without the inducement."
That was the purpose when the scheme was introduced and I've not seen anything to suggest it's been amended since.

2) I never used the phrase "line their pockets" - what I referred to was the point of the UK scheme not being "to provide subsidies that end up in overseas markets".
Again that may not suit the entrepreneur, but tax policy is meant to be developed with objectives in mind (and here it's a desire to increase investment in UK skills & resources).

I'm not defending any particular position (and certainly not claiming that a single strand of fairness & logic runs through all our tax legislation), but I think it's as well to try understanding the position from which a policy emanates even when one doesn't like the result.

Thanks (1)
Replying to Hugo Fair:
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By Dib
08th Aug 2022 20:02

Hi Hugo

Please don't patronise me when you have no idea of my involvement with policy.

I do not agree that "it's meant to encourage planned investment in growth areas that would not have taken place without the inducement." In practice it is meant to incentivise UK companies to become competitive in terms of innovation, new products etc. and to encourage global businesses to set up their R&D functions (with all their well educated, well paid scientists, engineers etc. and the associated infrastructure) in the UK to create direct and peripheral jobs here. That was the policy intention. That intention, or even your misunderstood one, is not served by making companies register to say they will be carrying out R&D!

2. Agreed, "line their pockets" was my take on it and not your phrase. However, policy never limited itself to the idea that the company would be constrained from using non-UK input. Tax policy in the R&D space is not to increase investment in UK skills & resources. If the Government wished to do that, it would be by a combination of incentivisation and resources aimed at the skills it felt were needed. That would not necessarily be via tax incentives (another policy research group I was involved with). It would also not be by cutting off the ability of companies carrying out valid and important R&D from a great pool of skill because it was not in the UK!

I almost agree that that there is no single strand of fairness & logic that runs through all our tax legislation although I would cynically say any of our tax legislation! But perhaps, in the case of R&D, which has earned UK Plc megabucks, maybe it ought to.

Thanks (0)
Replying to Dib:
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By Hugo Fair
08th Aug 2022 22:10

Sorry, but you have a strange concept of 'patronise' if you feel it can be applied by a person to someone whom he's never met and knows nothing about (which therefore makes it impossible to form a judgement as to the skills level to which patronising could be applied).

But back to the thread ...

If you've sat in policy meetings you'll recognise that there's seldom a single clear objective ... what emerges is a set of compromises even within the terms of the original political objectives, and that's before they evolve through the proposal & draft stages into something with which the advisers and SpAds can agree not to disagree in public!

So it can be hard to be unequivocal as to the policy intentions in most cases (indeed publications seem designed to obscure them, or at least reduce them to non-quantifiable soundbites that won't come back to haunt the signatory).

So, in the case of the original R&D schemes in 2000/2002 ...

* I find it hard to distinguish between your "it is meant to incentivise UK companies to become competitive in terms of innovation, new products etc" - and my "it's meant to encourage planned investment in growth areas that would not have taken place without the inducement".
What does your 'incentivise' mean if not the same as encouraging an action that would not otherwise take place (or to a smaller degree or at a later date)?

* Likewise your stated policy of "to encourage global businesses to set up their R&D functions (with all their well educated, well paid scientists, engineers etc. and the associated infrastructure) in the UK to create direct and peripheral jobs here" seems remarkably similar to my "the point of the UK scheme not being to provide subsidies that end up in overseas markets".
In other words we're both saying it was meant to encourage inward investment.

As I said before, although we obviously disagree - I'm not really sure why.

I'd have thought it was rule 1 in any plan/proposal for investment in R&D to establish the desired outcome (and certainly the methodology & measurement criteria) *before* starting the project.
The idea that innovation can be spotted as an opportunity 'after the event' (as a haphazard outcome from a different project) is the stuff of Hollywood movies - there are examples, but they're rarer than winning the lottery.

Likewise there are examples of the UK govt encouraging investment overseas, but they are the exceptions not the norm (and usually have a hidden agenda per 'Aid' development).

Thanks (2)