Is R&D tax relief entering a new era?

The last couple of years has seen monumental changes within the R&D tax relief world.  We are currently in an era where depending on when a company’s accounting period ends, it may be able to claim R&D relief under one of six different R&D tax relief regimes.  The complexity and reporting requirements for the R&D schemes has significantly increased, as has the level of scrutiny HMRC are directing towards company’s R&D claims.  This has resulted in a level of HMRC R&D enquiries the tax and accounting industry has never seen before.

Many R&D claimant companies who have received R&D relief previously, are now being denied tax relief on their R&D claims, significantly adversely impacting their businesses, profitability, cash flow and future growth and development prospects. Tax advisors and accountants working in this area have also been adversely impacted by the changes.  Some advisors no longer wish to advise or work in this area, due to the increased risks, complexities and reporting requirements.  Other R&D advisory businesses have gone under due to the increased work involved in supporting clients with their R&D claims, and reduced fee income when HMRC have denied their clients R&D relief.

To successfully claim R&D relief, companies now need to invest a significant amount of resource and time to support their R&D claims.  Their R&D systems, processes, evidencing, contracts and supporting documentation should in many cases be reviewed, to ensure they are robust and comprehensive.  Improvements should be made where weaknesses are found and companies should be proactive towards implementing any necessary changes.

Gone are the days where a company and/or its advisors can retrospectively think about R&D tax relief.  To protect the R&D claims, companies need to be proactive in this area and plan in advance, to mitigate risk in this area.  It’s important to be aware, if HMRC successfully enquires into an R&D claim, it can often adversely affect prior year R&D claims as well as the claim under enquiry, especially if an R&D project spans more than one period.  However, it could also affect future R&D claims, as the company may be now be on the HMRC ‘radar’, if previous claims have been found to be exaggerated or questionable.

Companies should consider having the following in place to fully support and evidence their R&D claims, and strengthen their position moving forward:

Detailed R&D Project Plans

R&D relief is claimed on a project-by-project basis.  For an R&D project to potentially qualify for tax relief, there must clear project objectives at the outset including, an aim to achieve a significant scientific or technological advance and attempts to overcome significant scientific or technological uncertainties.  These factors would suggest significant resource may be required and it would therefore be expected a comprehensive and detailed project plan should be in place prior to embarking on the R&D project.  HMRC will ask for the project plan and any relevant documentation as part of an enquiry process.

A good project plan should also assess whether the elements of the project will meet the definition of qualifying R&D for the purpose of an R&D tax relief claim.  If not, it may be an idea to consider whether the project parameters or objectives should be varied sufficiently to enable R&D relief.  For example, if an initial project plan sought to achieve an advance that a competent professional or expert in the field may deem routine or minor, it may be sensible, if also commercially viable, to amend the sought advance to a significant one.

Bear in mind, a project does not have to be successful to be able to qualify for R&D relief, so if the project did not achieve the newly sought significant advance, but during its course achieved the more routine initial advance, R&D relief should still be claimable, assuming the other R&D scheme criteria have also been met.

R&D Relevant Contract Reviews

Under the new R&D schemes, more emphasis is placed on who may be eligible to claim the R&D relief.  This is to stop more than one company claiming and ensure only the party leading the R&D work and assuming the risk can claim the R&D relief.  Whilst a contract is not exhaustive, if its terms state clearly which party may be able to claim the R&D relief, this is likely to add more weight to any argument, should HMRC raise queries at a later date.

Competent Professionals

To claim R&D relief, a competent professional or expert in the relevant field should have made a judgement that the project qualifies.  It therefore follows that a competent professional must be involved in the project, either on the company’s payroll or as an expert subcontractor.  Companies and their advisors should ensure R&D reports and documentation contain sufficient detail and information to evidence there are competent professionals involved in the R&D project.

Comprehensive R&D Reports and Documentation

R&D reports, additional information forms and advanced notification forms should contain sufficient detail to address any potential queries HMRC may raise.  This is likely to involve significant work from both the company and its R&D advisors.  If however, it means the R&D claim is agreed and no queries are raised, it should be well worth the effort.

Bear in mind, if HMRC open an enquiry and even if they ultimately agree the R&D claim, the significant amount of time, effort and resource required to respond to the enquiry can cause huge issues for the company, as it tends to be the company’s competent professionals and experts who are required most when enquiries are raised.  During this time, these competent professionals and experts may not be available to concentrate on the high-level development work they should be undertaking and leading.

Experienced R&D Support

There are so many complexities to navigate under the new R&D regimes and risks in this area, that having expert R&D advisory support is now deemed essential for many companies.  Experienced R&D advisors should know exactly what is required, and can guide companies through the complexities and R&D planning and information gathering processes, whilst helping them identify or navigate potential issues or nuances which may only be apparent due to experience.

If an enquiry were to arise, having the expert support in place to add an additional layer between the company and HMRC can often be invaluable.  An experienced R&D advisor will also often work closely with other expert professionals, such as solicitors or tax barristers for example, so will have access to this support as well to assist the claimant companies, if required.

Whilst there is a lot of doom, gloom and nervousness in the R&D tax relief world at the moment, for companies who are prepared to embrace the changes, this can create opportunity.  If those companies can claim R&D relief whilst competitors may not be able to, they may be able to benefit from competitive advantages and tax savings/repayments, to enable them to grow, further develop and achieve success in their relevant scientific or technological fields and businesses.

This article, written by our R&D and Tax Advisory Senior Manager, Rory Fothergill, was published in AccountancyAge, on 30 July 2024.

Is R&D tax relief entering a new era? - Accountancy Age