R&D Tax Credit FAQs - Changes to scheme in 2023

The government has announced that new claim notification and additional information requirements will now be enforced from 8 August 2023, not 1 August 2023 as originally planned.

There has been a lot of noise in the media and professional bodies about the change in the landscape of R&D Tax reliefs, with increased HMRC scrutiny on claimants and reductions in the amount of tax relief now available to SMEs.

With HMRC reporting requirements set to become more stringent from 8 August 2023, many business owners might be considering if it is still worth claiming the relief. The new rules, however, may raise a lot of questions.

To help you understand the new R&D landscape, Darryl Hoy, Technical Director of the Radius team and a former HMRC R&D Tax Inspector, answers some of the most frequently asked questions relating to R&D Tax Credits in 2023.

I’ve claimed R&D tax credits before successfully, am I still able to?

Yes, as long as you have qualifying projects that advance “overall” knowledge or capability in a field of science or technology.

The advance needs to be measured against the baseline in existing technology at the start of the project and you should document why it was not thought to be technically feasible to achieve the advance and that no knowledge existed in the public domain on how to achieve this.

Is HMRC cracking down on R&D claims?

HMRC has grown its compliance teams significantly in the last 18 months; this has led to a large increase in enquiries. Most claims are being reviewed before they are processed.

Previously, it appeared that a high percentage of claims were not being checked and this has meant that claims in some unusual sectors may have incorrectly been processed (care homes, as an example). This has led to HMRC being tasked to tackle the perceived error and fraud in the scheme and their increased compliance activity.

I usually let my accountant prepare the claim - Is that still ok?

It depends. Some accountants like Shorts have a specialist team of R&D professionals who will ensure the claim is robust and meets HMRC interpretation of R&D for tax purposes.

But if your accountant is a more general tax practitioner, then it can put a claim at more risk. We have found examples of claims where the boundaries of what qualifies were significantly wrong and have had to step in to correct mistakes. The key message is that R&D is a specialist area of tax and needs specialist advice.

I prepare the claim myself, should I seek help?

If you haven’t had the claim sense-checked recently, we recommend contacting a specialist advisor to review the latest claim. Shorts offer a free review service, please get in touch to find out more.

I’ve not had an enquiry before, so why should I be concerned?

We know HMRC are opening far more enquiries and denying claims that many in the profession would consider OK. This will often lead to a company having to pay back the tax claimed and have a penalty served on them which on average is likely to be a further 15% on top.

HMRC can also then go back a further 6 years if the same error is identified – imagine having to pay back 6 years of tax relief?

How will the new reporting requirements affect me?

It will be mandatory from 8 August 2023 to submit the R&D claim before your Corporation Tax return, using HMRC’s Additional Information form. You will be asked to describe the R&D projects the claim is based on to a level that a layman can understand the advance in science or technology you are attempting to achieve and allocate costs on a per-project basis.

• Read more about the new requirements for R&D claims

Will I need to keep better records now?

HMRC will expect you to keep contemporaneous records of the project from the outset, to justify that this an R&D project, from hypothesis and technical feasibility, through the project lifecycle, testing and results.

If you can maintain that level of record keeping and time spent by staff/contractors, plus any other project costs, then you will be on a very sound footing for making a claim. Of course, not all companies will have this level of detail, but someone in the business should be recording the R&D activity on a regular basis.

Will it be harder to claim R&D tax relief now?

The increased reporting requirements and reduction in the amount of tax relief could be seen to disincentivise businesses to claim.

Innovation is still a key driver of UK growth and so if you genuinely undertake R&D projects, then you should still be claiming the relief. After all, even with the reduction in relief, it still remains one of the most generous of tax incentives available to SMEs. The key is to make sure the claim is robust and if needed to seek specialist advice from firms like Shorts, who are here to help.

If I have not claimed before, what should I do?

Speak to a specialist advisor first, they will be able to help you assess if the projects meet the definition of R&D for tax purposes and tell you either way if it does or does not.

HMRC also has an “Advanced Assurance” scheme for new claimants up to a certain limit – more info is on the Gov.UK website. Also note that for periods beginning on or after 1 April 2023, you will need to pre-notify HMRC of your intention to claim within 6 months of the end of that accounting period, otherwise, the claim will be rejected.  

What if I receive grant funding or work as a subcontractor on projects?

As well as the SME scheme, the UK also has a scheme for Large companies or those that have received subsidies, such as a grant, or have work subcontracted to them by a large company.

This is called RDEC and although not as advantageous as the SME scheme, from 1 April 2023 an SME could still attract net 15% tax relief on any R&D spend. This makes it an attractive relief to claim still.