By Anne Rose, R&D Tax Consultant
Rates for research and development tax credits are set to change from April 2023 as part of HMRC’s planned overhaul of the R&D tax relief system.
These changes were first announced as part of the Autumn Statement in November and will impact any expenditure under both tax credit schemes incurred after April 1, 2023.
Rates changing
There will be changes introduced to the rates for both the SMEs and RDEC schemes, with small and medium size businesses set to lose out with a significant drop in funding available.
Larger businesses claiming under the RDEC scheme are actually set to see an increase in the rates, however the impact of the changes to both rates vary depending on whether you are a profit or loss-making business.
Advisors across the country were expecting a reduction in the SME scheme, but not this much, and now any qualifying expenditure leading to a cash back claim particularly will be much less generous for innovative small and medium sized businesses.
The changes could cut the cash benefit from the scheme by more than 50 per cent and that is a very big cut for SMEs that are seeking to invest in research and development.
HMRC has now issued a consultation on trying to move to one scheme, which is set to ultimately look more like the RDEC scheme. This is traditionally the less generous scheme, but we will see what the results are of that consultation process.
Other changes
Claim notifications – Companies will be required to make claim notifications under certain conditions. The requirement will apply to claims under both schemes.
This could see SMEs and start-ups penalised if they aren’t aware of this change in the rules.
Providing additional information – Claims will have to include a range of additional information, which is primarily around the nature of qualifying activities and breaking down the eligible expenditure to make up the claim.
New costs included – Cloud computing and data costs can be included in claims from April 1, which is a boost for any businesses in technology and media.
Why is this happening?
This is all part of the change in attitude from HMRC towards claims under the SME scheme, with the ultimate goal of this compliance activity being to reduce the number of claims that are being made under the scheme.
HMRC says this is all due to the increased number of invalid or fraudulent claims that they now receive… around 80,000 SME claims in total were received last year alone! The R&D tax relief scheme cost £7.7bn last year which is far more than was ever anticipated by the Treasury.
In order to crackdown on the fraudulent and erroneous claims, HMRC has now extended its target for processing 95 per cent of SME Claims to 40 days – to allow for additional checks and to halt what they call ‘rogue advisors’.
Last summer, HMRC set up a fraud team with the job of reviewing claims and warning that if claims were suspected of being fraudulent then they might ask for the money back from businesses.
It is difficult to challenge HMRC on these decisions as there isn’t a clear list of triggers which could cause such a reaction, but fundamentally the hope from HMRC will be that companies will give the money back in order to avoid a fraud claim… and then won’t make a claim again.
Additionally, around 2,000 small companies that have made previous claims received letters in January 2023. These letters were sent directly to the directors of a business and asked them to review their claims and get in touch with HMRC if they noted any irregularities.
The question remains whether this sort of HMRC activity is impacting the right people and whether fraudulent people will continue to claim until they are caught.
What is the impact for SMEs?
We hope that the changes in the rates won’t result in some SMEs with legitimate claims not proceeding, but that could be the case.
SMEs are a major part of R&D activity in the UK, exciting start-ups and businesses that are breaking boundaries are the backbone of innovation in this country.
Claims will be more robustly reviewed by HMRC under new proposals and businesses should be ready for increased scrutiny on all claims.
How can we help at Burgis & Bullock?
Our team is on hand to support you with any guidance around R&D tax credits. We are experts in this field and our vast experience will help to guide you through the process.
We offer an introductory phone call for no fee and would encourage any SMES or large businesses considering a claim to get in touch.
If you’re not sure, don’t worry and if you do not have time to read all of the HMRC guidance, don’t worry – talk to an expert instead.
To find out how Burgis & Bullock’s specialist tax team can support with R&D tax relief claims, visit www.burgisbullock.com or call 01926 451 000.