The government recently published draft legislation that documented a range of reforms to the R&D tax credit scheme, including the reforms to prevent abuse of the R&D tax credit scheme. If passed, these measures will affect businesses claiming both R&D schemes (SME and RDEC) and will take effect for accounting periods beginning on or after 1 April 2023.
The most important reform for HMRC internally is the enforcement of numerous administrative regulations to prevent abuse of the R&D tax credit scheme, but it’s also important that you know what’s coming so you can prepare for the changes.
The government first unveiled the plan in the 2021 Autumn Budget, and further information on changes to combat abuse was provided in the 2022 Spring Statement, and in the recent draft legislation.
What are the new anti-abuse reforms?
Several changes to help streamline the R&D claims submission process and combat abuse will be introduced. New conditions include:
- All claims will have to be made digitally (except for those companies exempt from the requirements to deliver a Company Tax Return online).
- Claims will have to give a breakdown of cost across categories, and a brief summary of the R&D activities performed.
- Claims will have to be signed off by a senior officer of the claimant company, as well as any agent(s) used as part of the submission.
- First-time claimants will need to notify HMRC in advance that they intend to file a claim. This has to be done within six months from the end of the relevant R&D accounting period.
Why are these changes happening?
The focus on tackling abuse is no surprise: the latest HMRC annual report and accounts document for 2021/22 estimates that error and fraud in the R&D tax relief scheme is 4.9% of the total value, a reasonable increase from the previous year’s estimate of 3.6%.
The pressing need for reform was further emphasised in April this year when HMRC detected an increase in fraudulent claims, resulting in a payout slowdown. This was also followed by an upsurge in businesses receiving letters from HMRC stating that their claims were under review, and requesting more information to clarify the claim’s credibility.
Due to reforms previously implemented in 2021 and 2022, HMRC is now better equipped to detect fraudulent claims. They have already:
- Established a threat risk assessment process for all R&D claims.
- Implemented additional payment identification and verification controls for all R&D payments.
- Created a new R&D Anti Abuse Unit.
Whereas the reforms above focus on HMRC, the new reforms from April 2023 will hold businesses and advisors more accountable. As a result, it’s now more important than ever that businesses ensure their R&D claim has sufficient supporting details and is fully checked before submission to HMRC.
As usual, EmpowerRD has fed back to HMRC with our thoughts about these proposals. Overall, we are pleased with the new proposed measures to help prevent abuse of the R&D tax relief scheme. However, we do have some suggestions for the amendments, which we fed back to HMRC early in September.
We especially welcome the introduction of a mandatory requirement to name any advisor who has helped with the R&D claim. At EmpowerRD, we always put our name on each report we submit. It’s critical to us that each claim is both compliant and optimised, and we’re happy to be accountable for each one we submit. We hope this requirement will encourage more responsibility within the R&D adviser market.
In addition to this, having a named senior officer of the company sign off the report should lead to an end to the practice of some R&D advisors not sharing the full report with a client. No-one should be signing something they haven’t seen! This has been an issue for some companies who have switched to us from other providers, so it’s great to see this issue addressed. Making the provision of supporting details mandatory is also a long overdue requirement.
We already provide HMRC with a comprehensive report in support of all our claims. This is now a great opportunity for HMRC to help raise the bar across the R&D advisor market. However, HMRC needs to be crystal clear about the precise level of supporting detail expected so that all can meet this standard. We hope that this level of detail will be included in the R&D regulations when they are published.
When it comes to pre-notification, we hope that the method of pre-notification is via an easy-to-use digital method, with scope for agents to help clients with this via an API. Importantly, we are also calling for the pre-notification deadline to be extended to nine months after the period ends, rather than the suggested six months. This is to allow companies more time to notify and to coincide with the current Companies House accounts filing requirements.
The above changes are significant. We’re keeping our clients informed about these developments but we’ve also reminded HMRC that it’s crucial for them to actively and effectively spread the word about these changes to ensure that all claimants are fully aware and prepared for when these changes take effect.