David O’Keeffe explains why HMRC is accepting late R&D claims following three changes to its guidance on reimbursed employee expenses.
On 14 August, by amending its web page about research and development (R&D) tax relief, HMRC announced that it will accept amendments to R&D claims to include eligible reimbursed employee expenses as part of qualifying staff costs, if the revised claim is submitted by 31 January 2018.
When claiming tax relief for R&D, the company must show how its figure of R&D-related costs was arrived at. The costs of employees and directors directly and actively engaged in R&D projects can be claimed, along with business expenses reimbursed to those individuals.
Change of practice
In 2013 HMRC decided it didn’t like the then current practice (which was supported by the legislation) in regard to reimbursed employee expenses within R&D claims and announced that such expenditure could not be included.
At the time, HMRC denied that it was seeking to change the practice on this issue, arguing that it was simply reiterating the position that had always applied.
That argument was never terribly convincing (not least because it contradicted HMRC’s own published guidance at the time), and I was not the only one to disagree strongly with HMRC’s position.
In October 2014 HMRC published a note (the 2014 note) that “clarified” its position that “reimbursed expenditure will only qualify for R&D tax relief if it falls within one of the specific classes of expenditure as outlined in the legislation.”
Guidance revised again
In October 2016, HMRC published final revised guidance on reimbursed expenses that contradicted the 2014 note in key areas. Indeed, it took us almost full circle back very close to the starting position. Whilst this was welcome (albeit somewhat frustrating), it did create a potential problem.
Some companies and their advisers will have looked at the 2014 note and concluded that it wasn’t sensible to include reimbursed employee expenses in their claim because of HMRC’s published position.
Then they will have read HMRC’s final revised guidance published in October 2016 and realised that they probably could have included those costs after all.
Why late claims are needed
R&D tax relief claims must be made within two years from the end of the accounting period they relate to, so it may not have been possible at that point to simply go back and revise the claim.
HMRC’s latest announcement makes it clear that it will accept late claims for the inclusion of reimbursed expenses within an R&D claim, subject to certain conditions.
The practice (see CIRD 83200) will only apply to claims for R&D relief originally made on or after 9 October 2014 in relation to periods ending between 9 October 2012 and 31 January 2016.
To be fair, claims in respect of periods ending after 31 August 2015 are still within the two-year deadline to be amended in the normal way, so the extension of the periods for which claims can be amended to those that end on or before 31 January 2016 gives a little bit of extra time for companies to realise that the 2014 note was wrong.
The company will also need to show that the original claim would not have been restricted (to exclude reimbursed expenses) had the company been able to rely on the guidance published on 27 October 2016 (at CIRD 83200).
Long and winding road
The process of getting from HMRC’s announcement in 2013 to the revised guidance in 2016 has been long and frustrating. I strongly believe that it could have been avoided had HMRC handled things differently.
I’m left with the feeling that HMRC’s position in 2013 had not been analysed and considered in sufficient detail before the announcement was made. There was considerable disagreement between HMRC and tax professionals, but HMRC seemed quite reluctant to engage in a meaningful discussion of the technical position. Indeed, HMRC seemed reluctant to provide a detailed technical analysis for some time.
Instead, we had three years of uncertainty and confusion whilst HMRC produced slightly differing arguments, then a definitive statement and then, finally, revised guidance that pretty much took us back very close to where we started. Even that revised guidance took eight months to publish, during which some people were aware of its content, but it did not represent published guidance.
Stephen Daly recently wrote about HMRC changing its guidance in the context of how that revised guidance is applied. My concern is the process by which HMRC amends its guidance and then makes that public.
I believe that HMRC should be much more open, inclusive and careful when changing its guidance in situations like this. Taxpayers and their advisers need to have confidence that HMRC is formulating and applying guidance fairly. Had HMRC consulted in a much more open and inclusive way about its shift in opinion on reimbursing employee expenses, I believe we would have got to the updated guidance a lot sooner and without the need for the current late claim policy.
About David O'Keeffe
I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.
I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief. In that time, I have developed an enviable level of knowledge of R&D tax relief both from a technical and a practical perspective. I established KPMG’s specialist R&D tax relief team and was a founder member of KPMG International’s Global R&D Tax Incentives Group and was a member of the Steering Group, with direct responsibility for the EMEA region.
I have provided input and consultation to many organisations and trade bodies. I was the only R&D tax specialist to have input to Sir James Dyson’s influential 2010 report "Ingenious Britain: Making the UK the leading high tech exporter in Europe" which is seen as the catalyst for reform of the UK’s R&D Tax Relief regimes. I have been a member of HMRC’s R&D Consultative Committee, a group with representatives from Government (HMRC, HMT and BIS) as well as industry, advisers and professional bodies, since its inception. I sit on CIOT’s CT technical Sub-Committee and chair the R&D Working Group of that sub-committee.
I was involved with the consultation process leading to the introduction in 2013 of the UK’s patent box regime. Since then I have helped his clients assess the merits of making a patent box election and then, where appropriate, to claim the benefit of the relief. More recently, I have actively contributed to the consultations around the design of the changes to the UK’s patent box to make it compliant with the OECD’s nexus requirements.
Formerly a Tax Partner with KPMG LLP (UK), I retired in 2011 to establish Aiglon Consulting.