HMRC recently announced that to ensure all claims made on research and development (R&D) tax are legitimate, and to prevent abuse of R&D tax credit payments, it will be strengthening its extensive compliance checks.
In this article, we explore why.
£7.4bn is the estimated total amount of R&D tax relief support claimed for the year ending March 2020, an increase of 19% from the previous year. This corresponds to £47.5bn of R&D expenditure, which is 15% higher than the previous year. These newly implemented checks will not only seek to scrutinize any and all claims, but also aid in a better understanding of the scale and nature of errors and fraud associated with these particular reliefs.
Despite allocation of extra resources, including the hiring of 100 supplementary compliance officers, these additional checks mean HMRC’s standard processing time will increase significantly. In lieu of this fact, HMRC has also noted that it is seeking to return to standard processing time as quickly as possible.
What is Research & Development Tax?
Research and Development reliefs are tax credit payments designed to encourage investment in innovation from UK companies. It can be claimed by a wide variety of different companies, regardless of size, who are working on innovative projects that seek to research or develop an advance in their field or resolve a particular uncertainty.
For the work to qualify, it is essential for it to be part of a specific project aiming to make advances in the spheres of science or technology. However, this only applies to the project itself, not to to the company as a whole. The tax credit allows a company’s R&D spend to be recovered, either as a reduction in Corporation Tax or a cash repayment. It is also possible to claim for projects that were ultimately unsuccessful.
What costs can I claim?
Starting from the date you began working on the project or resolving the uncertainty, you can claim a range of costs right up until you discover or develop an advance, or the project comes to an end.
Costs that qualify for R&D tax credits include:
- Staff – employee costs including salaries, pension contributions and employer’s National Insurance contributions.
- Subcontractor/freelancer costs (up to 65%).
- Some types of software, including software license fees.
- Payments to volunteers who took part in any clinical tests or trials.
You cannot claim for the costs of rent, capital expenditure, production and distribution of goods and services, or the cost of land, patents or trademarks.
How do I claim R&D Tax Relief?
You can make a claim for R&D tax credit payments up to two years after the end of the accounting period that it relates to.
Essentially, to claim the relief, you need to submit your enhanced expenditure into the full Company Tax Return form (CT600). Following this, you should use the online service to support your claim.
To calculate enhanced expenditure, start by working out costs directly attributed to research and development – remember to reduce any subcontractor or freelancer payments to 65% of the original cost. Add all costs together and multiply the result by 130% – this gives you the additional deduction to put into your tax calculations. Add this figure to the original R&D expenditure cost to get the figure for enhanced expenditure. This is what you must enter into your tax return.
Whilst there is no legal obligation to do so, it’s a good idea to produce an R&D technical report that not only justifies the advancements/uncertainties of the work, but also sets out the eligible expenditure being claimed on a project-by-project basis. The report should also include a short summary explaining the project, the start and end dates of the relevant accounting period, and your 10-digit company unique tax reference number. It may be helpful to speak to an R&D tax specialist when compiling any supporting documents to ensure they cover all necessary ground and to maximise your claim.
What does the ramp up in investigation mean for businesses?
The main consequence of the enhanced investigations is longer processing time for tax credit payments. Despite the standard processing time being 28 days, HMRC currently aims to pay the tax credit within 40 days. This means businesses should be prepared to wait significantly longer to either receive payment or be contacted regarding a claim.
The additional compliance officers working to implement these checks also means an increased level of scrutiny when inspecting R&D relief claims. However, this is unlikely to cause any problems, particularly if the claim has been checked by a qualified and experienced accountant or tax specialist, and all procedures outlined below have been properly considered.
What procedures to follow
It’s important to follow correct procedures when submitting a claim for R&D tax relief to ensure your application goes as smoothly as possible, particularly given the added level of scrupulousness that HMRC is currently fostering.
When putting together your claim, there are several points to consider in order to ensure it will meet the required standard. Make sure all entries are completed on the R&D section of the corporation tax return (CT600 form) and stay up to date with the latest guidance on completing the CT600 form on gov.uk.
Submitting any and all additional information to support the claim, including the R&D report, will help HMRC process the claim quicker, reducing any potential additional processing time. And finally, be aware that if a claim is submitted that is incorrect, inflated, or fraudulent then you may be liable to a penalty.
Get in touch
Compiling tax relief claims can be overwhelming. If you need to discuss any aspect of the claims process for R&D tax relief, or anything specifically regarding your claim, please do not hesitate to reach out to us at firstname.lastname@example.org.