Coming on the heels of the introduction of HMRC’s R&D taskforce, It comes as no surprise that the recently published draft R&D legislation includes many provisions to tackle abuse of the system.
HMRC is all too aware that some unscrupulous individuals have set themselves up as R&D specialists without any actual knowledge of the rules and the legislation that underpins them and without any expertise in that area. HMRC knows that there have been what they refer to as “abusive R&D claims” either as a result of negligence or dishonesty. Indeed, our clients tell us that they are regularly called by firms purporting to be R&D specialists who claim to be able to secure huge tax refunds for them. HMRC’s estimate of the loss due to incorrect or fraudulent claims tops £600 million.
What are the changes to R&D Tax Reliefs?
The legislation, which is due to come into effect on 1st April 2023, sets out a number of safeguards to prevent fraudulent activity.
- All companies claiming R&D tax credit will be required to make submissions online (except for those companies that are exempt from filing a Company Tax Return online).
- This will mean that HMRC are able to process claims faster.
- All companies that have not previously made an R&D claim will need to inform HMRC in advance of making a claim.
- This will allow HMRC to assess claimant companies’ business practices and whether the business genuinely undertakes R&D within the definition set out in the Department of Business, Innovation and Skills (“BIS”) guidelines.
- All companies who make claims will need to declare and include the details of any agent/company that has or is advising them
- Over the past few years, many firms have popped up claiming to be specialists and encouraging companies to make R&D claims. Some of these “specialist firms” have minimal knowledge of the BIS guidelines, or accounting procedures. They operate a fee structure that is based on a percentage of the claim amount. They will sometimes encourage businesses to make erroneous or overinflated claims. Collecting data on agents & firms operating in the R&D field has the potential to allow HMRC to identify the repeat offenders and reduce fraud.
Other key measures in the R&D Tax Relief white paper
- The draft legislation also includes detailed changes to the rules governing subcontracted R&D work. In future, only subcontracted work carried out through a UK payroll will qualify for the relief. There will be some obvious exceptions to this rule.
- Overseas “externally provided workers” (“EPWs”) can still qualify where there are material factors such as geography, environment, population or other conditions not present in the UK which are required for the research. Resulting in expenditure having to take place outside of the UK. There may also be regulatory or other legal requirements meaning that activities must take place overseas.
- An amendment to the time limit for making a claim means that the deadline will change from the end of the current accounting period, to two years from the end of the current accounting period.
- This will benefit more companies by giving them more time to make a claim and will assist HMRC’s new requirement to be informed in advance of a claim being made.
Engage with a proper Accountant
Accounting procedures surrounding R&D can be complex. It is always advisable to engage with a reputable firm of accountants with the knowledge of legislation, and the experience in dealing with R&D claims. Find out more about the benefits of using a Chartered Accountant.
For further information and guidance of either the Research & Development Expenditure Credit (RDEC) or the small or medium enterprises (SME) R&D relief contact us here at Friend Partnership.
Friend Partnership is a forward-thinking firm of accountants, business advisers, corporate finance and tax specialists. We act for entrepreneurial businesses and successful individuals on a national & international basis.