New Submission Requirements are invalidating R&D Tax Credit Claims

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The labyrinth of the UK’s R&D tax relief terrain has recently witnessed the emergence of new compliance norms, significantly impacting businesses across the nation. From 8th August onwards, companies submitting claims for research and development (R&D) tax reliefs have encountered stringent documentation requirements, and as initial insights reveal, nearly half of these claims have met with invalidation by HMRC.

The imposition of these new documentation prerequisites marks the inaugural impact from a series of compliance changes previously disclosed by authorities. R&D tax reliefs for expenditures, initiated from April 2023, have been curtailed, perceptibly impacting innovative Small and Medium Enterprises (SMEs) finalising year-end accounts for fiscal periods extending beyond this date.

The impact

HMRC reports indicate that roughly 50% of the claims lodged since the launch of the new mandatory digital information forms on 8th August have been inaccurately filed. The immediate consequence for non-compliance? Companies will imminently receive HMRC communications, declaring their R&D claims invalid, necessitating the amendment of their submissions.

While viable for some, companies that have procrastinated until the eleventh hour may witness their claims being forfeited. Although the exact number of claims rejected between 8th August and 30th September remains undisclosed, with 89,300 R&D claims filed in the UK for the 2020-21 tax year, the affected entities could potentially spiral into the thousands.

Understanding the why

Purpose of the New Submission Mandates: Aimed at mitigating erroneous and fraudulent R&D claims, the additional submission mandates have been strategically deployed. Here’s a brief overview of the enriched information requisites:

  • Endorsement of each claim by a senior business officer
  • Disclosure of any consulting agent involved in claim compilation
  • Detailed breakdown of costs across qualifying categories
  • Comprehensive description of the undertaken R&D activities

The Backstory

An escalating trend in R&D tax relief errors and fraud, especially over the preceding few years, propelled by a surge in unregulated R&D tax consultancies and the increased fiscal pressure on the Treasury post-Brexit, has prompted HMRC to intensify investigations.

For the 2020-21 fiscal period, error and fraud levels across both R&D tax relief schemes (SME and R&D expenditure credit) across all economic sectors were projected at £1.13bn. This represents 16.7% of claims, markedly overshadowing HMRC’s prior estimate of 3.6%. HMRC data reveals that qualifying R&D expenditures by UK firms amounted to £44.1 billion for 2021-22, a £3.3 billion elevation since 2020-21.

Upcoming Alterations to the R&D Tax Credit Scheme

Envisaging further refinements, the Government has postulated additional modifications to the R&D tax relief framework. These proposed transformations, stemming from HMRC’s anti-malpractice initiative and the consultation earlier this year, spotlight specific areas:

  • Scheme Consolidation: A prominent component of the Government’s earlier consultation proposed the debut of a singular relief system, anticipated to largely harmonise with the current RDEC scheme, albeit with a few probable exceptions outlined below.
  • Subcontractor Expenditure: Proposals suggest that large companies might be enabled to claim for qualifying subcontractor payments, potentially enhancing the RDEC scheme’s generosity by widening qualifying expenditure scopes.
  • PAYE Cap: Proposals lean towards adopting the SME cap, which is notably more liberal than the restrictive definition currently utilised by the RDEC scheme, thereby providing some companies with pathways to enhanced relief.

Navigating through the complexities of the new R&D tax relief structures necessitates a nuanced understanding and strategic approach. Stay tuned for more insights as we delve deeper into the unfolding scenarios in the UK’s R&D tax landscape.

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