Fears about excessive and fraudulent R&D tax credit claims being made by companies have resulted in HMRC launching a new R&D Disclosure Service. This service went live on 31 December 2024 and, as with all of HMRC’s disclosure services, it is intended to provide an accessible and streamlined process – in this case for companies to voluntarily disclose any overclaimed R&D tax relief. By making a voluntary disclosure rather than waiting for an error to be identified by HMRC, companies can expect to face lower penalties.
New R&D Disclosure Facility – Why might a company use this?
Most company directors and tax professionals have been expecting the R&D tax relief scheme to be abolished. Yet previous Budgets have come and gone with no end in sight. The regime has however been overhauled and is now significantly less generous. Not surprising, because in 2023 HMRC completed an analysis of R&D claims made during 2020-21 which revealed some alarming statistics. For instance, 24.4% of claims by value made under the SME scheme were either incorrect or fraudulent, and errors were found in 3.6% of claims made under the larger company (RDEC) scheme. The net result of these errors is additional cost to the Treasury of approximately £1.13 billion.
If your company have used the R&D tax credit scheme to obtain tax relief, consider whether you may have made any genuine errors and should use this facility. Companies may need it if they have either:
• Claimed too much R&D tax relief;
• Run out of time to amend their corporation tax return; or
• Have outstanding corporation tax or tax credits to repay.
Note that the new R&D Disclosure Service is only intended for accidental overclaims. Companies that have deliberately misreported a claim should use the Contractual Disclosure Facility instead.
What are the benefits of using HMRC’s R&D Disclosure Service?
There are lots of advantages to making a voluntary disclosure through the new R&D Disclosure Service. For instance, using it enables companies to:
• Proactively rectify any errors made rather than wait for HMRC to come after you;
• Potentially face lower penalties by being proactive about your mistakes;
• Gain more control over the situation and potentially agree a repayment plan with HMRC;
• Ensure that your corporation tax returns are correct and up to date.
What are the current R&D Tax Credit rules and eligibility criteria?
In case you are not familiar with this scheme, here is a recap of the current R&D tax credit rules:
R&D tax credits are only available to companies or entities that pay corporation tax. They are not available to partnerships or sole traders. To be eligible, the company must be undertaking qualifying R&D activities, seeking to achieve an advance in science or technology, and the work being undertaken must involve resolving scientific or technological uncertainties.
There are strict rules over what expenditure can qualify for the tax credits. It can only be used to offset staff costs, some subcontractor costs, plus the cost of consumable items and software licenses that were used during the course of R&D activities.
Currently two forms of R&D tax credit schemes are in operation.
1. SME R&D Relief designed for qualifying small and medium-sized enterprises. This entitles the claimant to offset an additional 86% of R&D costs against profits, or to receive a 10% cash credit if they are loss-making.
2. Research and Development Expenditure Credit (RDEC) is a scheme designed for larger companies. It offers a 20% taxable credit on any qualifying R&D expenditure.
If you are interested in making a claim for R&D Tax Credits, consider carefully whether you meet the qualifying criteria before making a claim. If you have made claims in the past, consider whether you should use the new disclosure service, for instance if you suspect past overclaims. It is always sensible to seek advice before approaching HMRC to make a disclosure.