R&D claims an “unbelievable” drain on company resources
Research & Development (R&D) tax credits have been in the news a lot of late – two significant changes to the scheme are expected to take effect from April 2023 while more imminently, HMRC is investigating the huge volume of what they call ‘spurious’ claims which have increased over the past few years.
R&D tax credits are intended to support companies investing in science and technology projects or schemes. To qualify, companies need to pay corporation tax, and the associated project already should involve either advancement, innovation or research in the science and technology areas. Staff costs, research contributions and software all qualify under the scheme.
Larger companies who claim R&D tax credits under the Research and Development Expenditure Credit (RDEC) scheme are entitled to a 13 percent RDEC rate.
HMRC figures show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).
Although, in theory, this paints a positive picture of innovation in the UK, a suspected uptick in spurious claims has sparked concern.
For instance, of the 85,950 R&D claims made, 85 percent were less than £100,000 in value – conceivably an indication of suspicious activity.
HMRC investigations (ongoing): HMRC is now clamping down on ‘spurious’ R&D claims. Their figures show that £612million has been lost through incorrect R&D claims. As part of this, HMRC has recruited 100 additional caseworkers to add a heightened level of scrutiny over R&D claims.
R&D tax credit changes (from April 2023): Chancellor Rishi Sunak announced during the budget that there would be two significant changes to the R&D scheme from April 2023, including:
- Extension of R&D scheme. Currently, cloud computing and data costs are not included in the scheme. Still, under the changes, the scheme will be extended to include these key areas to recognise the increased use of cloud software and data hosting.
- Focus on UK-only innovation. From April 2023, R&D claims will be restricted to UK-only activity, affecting companies who subcontract R&D overseas.
- Certain conditions have to be met in relation to the expenditure, as follows:
- It must be revenue not capital in nature.
- It must be related to a trade carried on or to be carried on by the company.
It must be incurred on:
- staff costs
- software or consumables
- relevant payments to the subjects of clinical trials
- subcontracted R&D costs or
- externally provided workers
It must not be incurred in the carrying on of activities which are contracted out to the company by any person.
It must not be subsidised.
In respect of expenditure or activities contracted out to the company and subsidised expenditure, an SME is allowed to claim an equivalent to the R&D expenditure credit provided it would be available to a large company in the same circumstances.
In addition, the company must be a going concern. Companies in liquidation or administration are not going concerns.
Consumable R&D tax credit
The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.
Once your work to resolve the technological or scientific uncertainty is finished, any additional costs for consumables (such as materials for cosmetic fine-tuning or marketing) cannot be included in your claim. It would help if you were careful only to have the consumable costs related to your R&D work – this may differ from the consumable costs for your entire developed material, product, process, or service.