R&D claims: Government urged to strike the right balance

Research and development
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Tax credit experts have urged the government to strike the right balance between preventing fraud and discouraging innovation before the introduction of the new rules on R&D claims in April 2020.

Last month, a government consultation outlined implementation details of the R&D tax relief cap announced at the 2018 Budget, which is due to come into force in April 2020.

The R&D tax relief seeks to promote investment in innovation by reducing a company’s corporation tax bill or by making a cash payment to the company. Since its introduction in 2000, UK businesses have filed over 240,000 claims – the equivalent to £21.4bn in tax relief. However, the government estimates that fraudulent claims have cost the taxpayer up to £300m.

The new measure seeks to prevent abuse of the SME scheme by limiting the amount of payable tax credit that a loss-making business can receive to three times the company’s total PAYE and NICs liability.

In a recent company announcement, Luke Hamm, CEO at R&D specialist provider GovGrant welcomed HMRC’s decision to tighten the system but warned about the risk of negatively affecting genuinely innovative companies.

“We fear there are a growing number of agents willing to help game the system,” said Hamm. “It is encouraging that the consultation wants feedback on which companies may be adversely affected, but we must protect companies who need to contract out this expertise to make their vision a reality.

“Abuse does need to be addressed through the current HMRC process, which could include potential further oversight of agents, but it is essential that we don’t create barriers for deserving companies to access the scheme by making the process more complex.”

Fewer claims

Despite the number of fraudulent claims, the number of R&D tax credit claims actually fell in the 2016-17 financial year: the first time it has done so since the introduction of the scheme in 2000. According to HMRC’s Research and Development tax credit statistics, in 2016-17 UK businesses made 8% fewer claims for R&D funding than the previous year.

There are also significant regional differences. London, the South East and the East of England account for 45% of all claims and 60% of the total amount claimed for 2016-17, although Northern Ireland has the highest rate of innovative companies in the UK with more than 60,000 active enterprises and one R&D tax credits claim made per 51 businesses.

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17th Jun 2019 09:07

This all comes back to the basics of HMRC simply not checking enough claims, which allows firms to go around marketing spurious claims and running a business out of it, on the basis only a small % will ever get picked.

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By VIOLA55
17th Jun 2019 10:14

There shouldn't be a cap placed on R&D tax relief claims; if it is genuine R&D it should be tax relievable and if it isn't, it shouldn't - simples! HMRC do need to put more resources into checking the claims made to ensure the system isn't being abused. Now that HMRC has almost completed its work on combating and settling disguised remuneration tax schemes, it should be able to free up resources and deploy them elsewhere. It is lazy of the Government to try to deal with the problem of fraudulent / spurious R&D claims by merely introducing a cap.

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