Tax Reliefs and Incentives – R&D developments

Liam McHenry
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The number of important developments in respect to the R&D tax relief regime in the last number of weeks should attract both optimism and caution.

HMRC recently published updated statistics covering R&D claims made for the period ended 31 March 2020. In a continuation of the trend from recent years, the level of support provided to businesses via R&D tax relief has continued to grow.

Nationally, 85,900 claims were made, which represents an increase of 16%, with claims now worth £7.4 billion. Locally, the number of claims made by businesses in Northern Ireland has also continued to rise. In previous years, the largest volume of SME claims where within manufacturing – this has now been eclipsed by rapid growth in the Information and Communication space (23%).

More advisors entering the market has been helpful to increase knowledge of the scheme to potential claimants, however this should also be viewed with a degree of caution due to quality and technical issues within several R&D claims that we have subsequently reviewed and amended.

It has been widely reported in the past weeks that HMRC has bolstered the numbers of staff within their R&D unit, enabling greater scrutiny. Indeed, details released by HMRC indicate that twice as many R&D enquiries are now being opened, as they consider incorrectly or fraudulently prepared claims to be a serious risk area. Be aware that even if you have sought professional advice, it is still possible in some circumstances for HMRC to levy penalties on the company or the directors.

It is, therefore, important to ensure that your advisor has sufficient experience when preparing your claim and the confidence to defend any potential enquiry. Increasingly, we are being asked to step in to negotiate with HMRC after the original advisors have stepped away from the enquiry process.

In more positive news, a potential move by HMRC to limit the scope of R&D relief claims has suffered a significant setback in a recent tax tribunal. HMRC had sought to apply a very broad interpretation of ‘subsidised’ R&D, which would have had significant adverse implications for any business which undertook R&D activity (at their own risk) to meet customer requests. For now, eligible businesses can continue to claim under the more generous SME regime, however, HMRC may seek to appeal the decision.

More changes to the R&D regime are also coming in 2023 – with the UK Chancellor announcing that cloud computing costs are coming into scope. Measures to curb UK claims on qualifying expenditure being incurred abroad will come into effect at the same time. As many companies in Northern Ireland operate on across the border, this may reduce the ability of your business to make claims on certain expenditure.  As these changes have not yet taken effect, there is still time to take the necessary steps to ensure that your ability to claim R&D in the future is protected.