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UK R&D Tax Credit allows companies undertaking innovative activities and qualifying R&D projects to claim corporate tax relief and/or tax credits on qualifying R&D expenditure.
The aim is to encourage UK innovation by providing relief on eligible R&D expenditure, effectively reducing the cost of R&D work for eligible companies. This has enabled companies to invest in vital R&D aimed at achieving scientific and/or technological progress, which typically leads to additional employment and greater expertise in Britain. It is widely recognized that without innovation in business, economies will not grow. Therefore, reducing R&D tax credits and discouraging valid companies from making claims could see Britain fall behind other major global economies.
R&D tax credits have been around for over twenty years, but there have been huge changes in recent years, including a significant increase in the number of HMRC investigations. Over the life of the R&D schemes, the number of companies claiming R&D tax credits has increased exponentially, partly because companies and their advisors have become more experienced and adept at identifying qualifying R&D activities, but also because some companies, often misled by rogue R&D consultants, pushed the boundaries of the law, leading to the filing of exaggerated and fraudulent claims.
Historically, HMRC’s investigation rate has been 1% and the vast majority of R&D claims have been processed with no or few questions. This all changed a few years ago with the introduction of the HMRC R&D ISBC research team. It was widely accepted in the accounting and tax communities that change was needed to tackle inflated and fraudulent R&D claims. disastrous consequences for the real claimants and has the potential to cripple the UK economy and innovation.
The ISBC unit was mainly made up of newly trained and inexperienced R&D staff and whilst the investigation process rightly focused on companies making over-inflated and fraudulent claims, HMRC’s volume approach to investigations also focused on genuine eligible companies, which have been overtaken in drawn out investigations, where HMRC has in some cases ignored evidence and denied companies the opportunity to discuss the R&D claim in person, instead adopting a tunnel vision approach to deny genuine eligible companies this vital tax relief.
For other HMRC taxes, opening investigations usually involves an HMRC fiduciary/inspector, allowing a level of understanding, direct contact and collaboration between taxpayers, advisors and HMRC to ensure the correct amount of tax is paid , which has made honesty possible. and confidence in the investigative process, fully consistent with the Taxpayer Charter. Unfortunately, this is not the case with the ISBC unit as no names are provided about the HMRC staff conducting the investigations, reducing liability and recovery options where serious errors have been made.
The accounting/tax profession and their professional bodies are understandably in uproar about HMRC’s shortcomings and the negative impact this has on companies that actually undertake qualifying R&D. Some businesses have found themselves in serious financial difficulties and many have thrown in the towel and decided not to challenge HMRC’s decision to reject their claim because they do not have the resources to fight against HMRC’s power. Businesses do have the option to appeal HMRC’s decisions to a tax tribunal, but doing so requires significant costs and time that many businesses, especially start-ups, simply cannot afford.
It is easy to overlook the significant and cumulative negative impact that a lack of investment in innovation by businesses is likely to have on the UK economy in the future. With thousands of legitimate research and development companies facing an unjust and unfair research process, and the negative consequences this entails, many have had no choice but to reduce or completely reduce the resources devoted to innovation to stop innovating. Although tax revenues from HMRC denying legitimate claims appear to increase in the short term, the long-term negative impact on economic growth and associated tax revenues could be devastating, impacting all sectors and supply chains.
The Chartered Institute of Tax (CIOT) has written extensive open letters of complaint to HMRC about the serious shortcomings in the current R&D research process. However, despite HMRC recognizing the lack of training and that serious mistakes have been made, not enough is being done to address HMRC’s shortcomings, or to tackle unscrupulous R&D consultants.
The reduction in available tax relief, the higher costs required to support R&D claims, combined with the increased risk of HMRC denying true qualifying companies, has significantly deterred companies from investing in innovation, creating a perfect storm and a potentially disastrous effect on growth in the economy moving forward.
It is now more important than ever that genuine R&D applicants ensure they work with experienced, trusted R&D tax advisors. Working with their advisors throughout the year to develop their R&D strategy, understand the complexity of the R&D programs and increased demands and capture evidence in ‘real time’ is now essential to supporting their R&D claims and limit the risk of an investigation. Gone are the days of a ‘lightweight’ approach at the end of the financial year. It is crucial that companies choose the right R&D advisors and challenge the advice they receive. If something seems too good to be true, it often is. But with the right advisors, expert advice and a robust R&D strategy, companies can navigate the complexities of R&D programs to ensure that if HMRC does ask, their claims can withstand this intensive and rigorous scrutiny. This in turn should help restore confidence in R&D tax relief schemes and encourage the innovation and growth the UK economy needs.