Research and Development (R&D) Tax Relief

Government’s Response to House of Lords Research and Development Inquiry: Key Changes Revealed.

In January, the House of Lords released a report detailing its inquiry into the alterations made to the R&D tax relief scheme. The report was critical of HMRC, pointing out inconsistencies, a lack of consideration for information provided by claimants, poorly focused questions, and a reluctance to engage constructively with taxpayers and agents.

The House of Lords’ report presented 56 suggestions, observations, and recommendations to enhance the R&D tax relief schemes for beneficiaries. In response, the Government quietly published a 17-page document on April 13, 2023, without much publicity, and you can find it on the Committees’ website. This response provides some insight into HMRC’s future plans.

research and development

Key points from the Government’s response are as follows:

Compliance Activity and Staff:

  • An “Anti-Abuse Unit” became operational in July 2022, likely contributing to the significant increase in R&D enquiries noticed around November 2022.
  • HMRC employs over 200 individuals in R&D compliance teams, supplemented by staff from other departments based on demand.
  • The Government partly acknowledged the need to address criticisms of its compliance activities, but there seems to be no immediate change in HMRC’s approach.
  • HMRC accepted the recommendation to review the training of R&D staff to work with companies claiming relief effectively.
  • The R&D Error & Fraud estimates for 2022/2023 was published in July 2023 as part of the annual report and accounts. However, HMRC may withhold specific details due to concerns about affecting future compliance efforts.
  • HMRC partially accepted the suggestion to improve access to scientific expertise when evaluating R&D claims.

Future Changes to Rules and Guidance:

  • The Government rejected the proposal to eliminate claim pre-notification, asserting its significance in combating errors and fraud.
  • It will not invest in new explanatory materials for SMEs until HMRC comprehensively reviews responses to its consultation on merging the two R&D schemes.
  • HMRC is developing a new consultation on “Guidelines for Compliance” to help R&D claimants understand their obligations.
  • Before 2024, HMRC commits to comprehensively reviewing and updating its online guidance on R&D (CIRD80000), but specific examples might still be limited.
  • The Government does not intend to resolve the uncertainties arising from the Quinn (London) Ltd tribunal case, potentially leading to continued confusion and conflicts over subcontracting.
  • HMRC acknowledged the low uptake of Advance Assurance for SMEs and showed no enthusiasm to reintroduce it before designing a unified R&D scheme. They also rejected the suggestion of offering Advance Assurance for RDEC claims.

Expectations for Research and Development Tax Relief in 2023: While the Government’s response glimpses into HMRC’s actions, they did not take the House of Lords’ recommendations seriously. The Government intends to establish a single R&D scheme for both SMEs and Large Companies, scheduled to take effect in April 2024. Despite their claim that no final decision has yet to be made, it seems likely that they will continue the controversial approach to enquiries, starting with assumptions of ineligibility and dismissing contrary evidence.

What is Research and Development Tax Relief?

Research and Development (R&D) Tax Relief is a government incentive program designed to encourage and support innovation in various industries by providing tax relief to companies that engage in qualifying research and development activities. This initiative aims to stimulate technological advancement, scientific discovery, and economic growth.

The R&D Tax Relief scheme varies from country to country, but many countries worldwide have versions of this incentive. In the UK, for example, there are two main types of R&D Tax Relief:

  1. R&D Tax Relief for Small and Medium-sized Enterprises (SMEs): SMEs can claim a higher rate of tax relief on qualifying R&D expenditure. As of my last update in September 2021, SMEs can get up to 230% deduction on their qualifying R&D expenses when calculating their taxable profits, effectively reducing their tax liability.
  2. R&D Expenditure Credit (RDEC): Larger companies and those that subcontract R&D work to them can claim the RDEC, which provides a taxable credit on qualifying R&D expenditure. The RDEC rate may vary and depends on the size of the company and the time when the R&D activities were undertaken.

To be eligible for R&D Tax Relief, the R&D activities must meet specific criteria defined by the Government. Typically, research and development should aim to achieve an advance in science or technology and involve overcoming scientific or technological uncertainties.

Companies seeking to claim R&D Tax Relief must submit supporting documentation and demonstrate how their projects meet the required criteria. This could include technical reports, project plans, and financial information related to the R&D activities.

It’s important to note that R&D Tax Relief regulations are subject to change and may vary depending on the country or region. For the most up-to-date and accurate information, businesses should consult with tax advisors or government resources related to R&D incentives in their specific location.

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