Like many R&D tax relief practitioners over the last few years, we have become aware of a significant increase in R&D tax relief related audits and enquiries. In fact, our own regular caseload has grown between four and fivefold since lockdown.
While some of this can be explained by the enthusiasm of the fresh batch of officers recently recruited into the HRMC R&D unit, not all of the growth in enquiry rates can be attributed to youthful zeal. Instead most of it is due to HMRC’s increased crackdown on non-compliance and their efforts to drive provision of accurate information in tax relief claims, as well as a general tightening up on the interpretation of the rules, in order to reduce the incidence of inaccurate claims and fraud.
An area of confusion is the interpretation of the rules related to claiming R&D tax relief in subcontract scenarios. A prominent case in 2020 demonstrated that HMRC considered the R&D to be subsidised by the commissioning company, when a claimant undertakes R&D work while completing a commissioned contract. Not only was the claiming company subjected to a protracted enquiry but at the end of this process HMRC concluded that the company had incorrectly claimed through the SME scheme and would need to resubmit its claim through the less generous RDEC scheme, reducing the overall benefit the company received. All of this represented a significant investment of time and effort for the company and all for a smaller return.
In order to ensure that they stay on the right side of HMRC’s interpretation of the rules and reduce the likelihood of an enquiry, it is critical that claiming companies are clear on a number of points:
- Are the technical challenges intrinsic and critical to the completion of a contract or could the contract be completed without addressing the technical challenges? Meaning the eligible R&D activity may lie beyond the remit of the contract.
- Similarly, did the financial compensation for the contract include a payment specifically for any R&D work packages carried out or was R&D expenditure at the discretion of the subcontractor and paid for from its own resources?
The answers to these questions give a strong indication as to where both the technical and financial risk might lie within a contract and, consequently, which party has the strongest claim over a potential R&D tax relief claim.
With all this in mind, it’s easy to see that whilst many companies will have applied for R&D Tax Relief for many years or have a good understanding of the scheme, continued reform of R&D tax credits by HMRC means that extra caution is needed. That’s why it's always a good idea to have and R&D tax expert such as ABGI help you though the process to ensure your claims are compliant, maximised and risk-free.
Make UK members who have questions relating to R&D tax relief or wish to discuss the implications of recent changes to the R&D tax relief scheme, can contact Sandy Findlay on 07807 739033 or email [email protected]
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