After conducting a detailed sampling and assessment exercise of hundreds of research and development (R&D) claims, HMRC has realised that around half of all claims contain an element of non-compliance. Given the large and growing sums involved (£7.6bn of tax relief was given in 2021/22), a 50% error rate in claims is both startling and highly concerning for the Treasury.
To help claimants gain a better understanding of the types of work they should be claiming for, HMRC has recently published its long-anticipated guidelines for compliance (GfC). This is a comprehensive explanation of not only its expectations for applicants, but also of the complex Department for Science, Innovation and Technology (DSIT) guidance that should be used to determine whether projects qualify for R&D tax relief.
HMRC’s hope is that by providing lots of new examples of how the DSIT definitions and guidelines should be applied, companies will be more likely to make compliant claims and avoid some of the most common errors that cause HMRC to reduce or deny R&D claims.
Key things to know
The new guidelines aren’t exactly succinct. While the DSIT guidance is around 4,300 words, the supplementary GfC add an extra 10,500 words to your reading list. Be prepared to set aside a good hour or so to digest them, particularly Part 4, How to identify qualifying R&D activities.
For those in a rush, here are some of the key points.
- Preparation is paramount. The GfC explains that HMRC expects your clients to undertake a significant amount of preparation before even starting to work with you. Of the 13-step claim preparation process they describe, the first nine should be completed by the company’s competent professional. They suggest that the final four steps should be completed by the company and/or its agent, with support from the competent professional.
- The competent professional is king. The GfC puts far heavier emphasis on the role of the competent professional than the DSIT Guidelines or even the corporate intangibles R&D manual (CIRD). It’s therefore vital that claims are prepared with the full involvement of someone who has significant experience in the relevant area of science or technology. Without a person of that calibre and credibility, the claim is much more likely to be rejected.
- Key terms are explained using examples. The longest part of the GfC relates to the definition of R&D and how it can be identified. The new guidance talks at length about:
- the definition of a project
- how using technology does not necessarily constitute R&D
- the activities that constitute R&D
- guidance on how to interpret subjective terms like “readily deducible”
- when unoriginal work may qualify (in other words, when the advance isn’t new)
- when R&D is deemed to start and end
- ...and much more.
To give HMRC credit, it has clearly put a lot of thought and effort into trying to come up with examples and explanations that make the DSIT guidance easier to understand and apply.
- Additional bureaucracy. The GfC also reminds you that claims starting on or after 1 April 2023 may be subject to prenotification rules. These stipulate that companies must inform HMRC of their intention to claim R&D tax relief if they haven’t claimed within the three-year period that ends six months after the last date of the accounting period. The GfC also reminds you that the additional information form must be completed for all claims submitted on or after 8 August 2023.
Reading and understanding
What is this likely to mean for companies applying for R&D tax relief? Going forwards, companies wishing to claim for R&D tax relief are going to have to invest more time in reading and understanding HMRC’s now comprehensive guidance for applicants. HMRC has been very clear about the responsibility for the claim resting with the applicant, not its adviser, so blaming poor advice won’t help claimants to avoid penalties for careless claims.
Furthermore, companies should be assessing whether they even have competent professionals in the area they wish to claim an advance. For example, people who have taught themselves to program would not be accepted by HMRC as being competent professionals. Similarly, companies wishing to claim for the development of new (to them) IT systems might find themselves at a loss when asked to explain the underlying technological advances and uncertainties within the greater commercial project. And if they can’t explain those, they shouldn’t be trying to claim R&D tax relief.
Indeed, we suspect that if the GfC is followed diligently, the overall number of R&D claims will fall significantly – but the ones that remain will be more robust and compliant, which is exactly what HMRC wants.
With the Autumn Statement just around the corner, we’re expecting to hear further details on how and when the current R&D expenditure credit and small or medium-sized enterprise (SME) schemes will be replaced by a single, unified scheme – and confirmation on how this new scheme will treat grant-funded projects and R&D-intensive SMEs.
