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Business Services  •  Business Tax  •  R&D Tax Credits

R&D tax credit rules become stricter

By RJP LLP on 24 August 2022

The R&D tax credit scheme has been extremely successful in encouraging innovation among UK businesses. Records from Gov.uk show that the total number of R&D tax credit claims for the year ended March 2020 is estimated at 85,900, an increase of 16% from the previous year. Of this amount, 76,225 were from SME companies.

The value of tax relief provided is considerable, with the estimated total amount of R&D tax relief support claimed for the year ended March 2020 running at £7.4 billion; an increase of 19% from the previous year. This corresponds to £47.5 billion of R&D expenditure; 15% higher than the previous year.

Unfortunately, HMRC is facing serious problems with ongoing fraud cases and consistent errors being made in the research and development (R&D) tax credits system. These problems were highlighted in HMRC’s 2021/22 annual accounts; it is estimated that erroneous claims and fraud in relation to R&D tax relief amounted to £469m in 2021/22, according to the National Audit Office (NAO) and the vast majority of expenditure is attributed to SME companies. In 2020/21, it was estimated at £336m, so a considerable increase.

In 2021/22, the estimated fraud and error rate was 4.9% compared to 3.6% in 2020/21 and the value of cases confirmed as fraudulent rose from £11.2m in 2020/21 to £26.9m in 2021/22, according to HMRC’s Fraud Investigation Service (FIS). Many of the claims received were deemed as speculative and were disallowed because the activities could not be classed as R&D according to HMRC’s definition.

New process expected in 2022 Finance Bill

To try and stop funds being misappropriated and work out how to stop abuses, HMRC paused all R&D claim payments in April 2022. In July, HMRC announced a commitment to tackling fraud and errors within the claims for relief, with tougher risk assessments and more resources allocated to combating fraud. We can expect the 2022 Finance Bill to detail these new measures and early updates suggest that new measures introduced will include the following requirements:

  • Future R&D claims must be made digitally;
  • Claims must include detailed descriptions and costs for R&D activities across qualifying categories;
  • Claims should be endorsed by a named senior officer of the company;
  • Companies seeking to claim should inform HMRC in advance and within six months of the end of the period to which the claim relates;
  • Claims should detail the name of any agents who have advised on compiling the claim.

In addition to tightening up the R&D claim process, HMRC has already implemented new payment verification controls. A new department, the Research and Development Anti Abuse Unit, is also being created.

There is a level of uncertainty around the long-term future of R&D tax credits because an early autumn Budget will most likely be called once the next UK Prime Minister has been confirmed. We will be keeping a close eye on developments and reporting back on any changes as they happen.

If you are interested in making a claim for R&D tax credits, contact RJP to see how we can support you. The team here has advised many companies and helped them to secure successful claims.

Reach us via partners@rjp.co.uk

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