Stef Fielding, tax director at Sapphire Contracting and Accounting, shares his insights on the impact of HMRC’s crackdown on R&D claims on small businesses and his advice to businesses looking to make a claim.
Over the last three years, we have seen HMRC adopt a draconian line when it comes to assessing R&D claims. HMRC has moved to challenge a whole range of R&D claims that it might not have previously.
Research & Development (R&D) tax relief was originally introduced to support companies that work on innovative projects in science and technology. However, an analysis of R&D claims for the 2020-21 tax year revealed a significant level of non-compliance, with almost a quarter of claims under the SME scheme were either erroneous or fraudulent, equating to £1.13bn in costs.
These figures prompted HMRC to tighten scrutiny and enforcement measures, bolstering compliance operations and inspections from March 2022. HMRC then further reinforced compliance efforts in August 2023, introducing additional forms to be completed alongside claims. Although this reduced the number of fraudulent applications, these changes also resulted in delays to the process of legitimate claims, increasing frustration and discouraging applications.
A new hurdle for SMEs to overcome
Following the changes, any new R&D claims now need to be preceded by an R&D notification form. Businesses must notify HMRC of their intent to make an R&D claim within six months of the accounting period ending, where they intend to make an R&D claim for the first time.
Claims are also required to be accompanied by a mandatory Additional Information Form (AIF), which includes information on why the project(s) in question meets the qualifying criteria for R&D. These narratives need to be carefully crafted and passed through the various legislative requirements.
Data has revealed that the number of British companies listed among the global top 2,000 spenders on R&D almost halved in the 10 years to 2023. It would seem that HMRC’s more extreme approach to compliance has had a knock-on effect when it comes to business’ appetite to launch costly R&D projects.
The additional forms required not only take up additional time, but they have driven up the fees charged by advisers and made the ‘prize’ of a successful R&D claim less attractive. Coupling those factors; the increased compliance activity and the reduction in net financial return, it is no surprise that R&D activity is falling in the UK.
Industries facing higher scrutiny
In the face of these changes, any R&D projects that relate to the development of a software-based product should be approached with particular caution. HMRC is being especially rigorous when it comes to challenging such projects, requiring claimants to declare whether the R&D project relates to software development within the AIF to easily identify such claims.
Businesses operating and trading in a way that is reliant on the acceptance of any R&D claim from a cash flow perspective should also be wary. This approach can be extremely risky and businesses should view the receipt of a R&D tax credit as a bonus, rather than something that they become overly reliant on.
Tangible advice to businesses looking to make a claim
For businesses that are seeking to make an R&D claim, they should first think critically about whether their activities actually represent a qualifying R&D project. Can they point to a bona fide scientific or technological uncertainty? Can they demonstrate that their work has created appreciable improvements? Has their work moved the dial within their given industry? Only if they can answer yes to those questions, should they proceed to make a claim.
Now more than ever, businesses that decide to proceed with an R&D claim need to ensure that they get the administration of their claims right. HMRC are operating a zero-tolerance policy when it comes to R&D claims and are looking for any excuse to knock claims out. Businesses that fail to step through the administrative ‘hoops’ correctly will simply have their claims rejected.