Behind the scenes at HMRC changes are happening to the R&D Tax Claims scheme and service. Recent press releases and comments on social media indicate that concerns are being raised by business owners. Innovation Cashflow Services (iCS), who provide specialist advice on R&D claims, agree that things are more than a little out of kilter at the moment on the front line:
• Claims are being processed very slowly (slower than published HMRC targets)
• This means delays in repayments to claimants
• Letters from the Fraud Investigation Service (FIS) are sending a shockwave through the sector
HMRC remain a secretive organisation, so these issues are leaving agents, accountants, advisors and clients concerned and very frustrated!
Mixed messages about R&D
The government and HMRC are currently sending out mixed messages. The government’s target is to increase the legitimate spending on R&D up to 2.4% of GDP by 2027 but HMRC’s current behaviours could jeopardise reaching this target.
The scheme is under review with expected changes announced for April 2023.
Is the R&D tax claim problem real?
The short answer is ‘yes.’ The scheme has been running for over 20 years, however, after Brexit, the UK Treasury are now footing the bill. Over the years, iCS believe the scheme has become open to abuse and that it’s time that fraudulent and non-compliant claims, submitted by dishonest advisors, were weeded out. Bad practices need to be stopped. We think it’s right that the Government demands more ‘bang for their buck’ from this scheme. The challenge for HMRC is how to do this quickly and effectively.
Over the last 2 years, HMRC has hired hundreds of new R&D inspectors, including more technical specialists, to allow them to review more claims in depth and to increase the number of enquiries.
In mid-May 2022 HMRC announced that they were pausing the paying out of R&D tax claims and this has caused a knock-on effect on processing times. The real issue is that as professional and ethical advisors we are caught up in the slow down. This is causing us real frustration and leading to potential cashflow issues for our clients. With no accurate timescales to work to and very little direction by HMRC, we are having to second guess what’s happening, and HMRC may be shooting themselves in the foot with their current approach and methods. iCS believe that the backlog is currently getting bigger.
To compound the confusion, HMRC appear to have changed their enquiry process too. There are reports that initial letters from the Fraud Investigation Service (FIS) rather than HMRC’s R&D tax team are in circulation. The wording is threatening even though they do not actually accuse the claimant of committing fraud, but many are interpreting them that way. iCS believe these letters are designed to scare people into withdrawing any suspect and weak claims, make advisors think twice about the advice they give, and focus the claimant on the size of claim being made. Whilst these are all valid objectives the communication to the sector is poor.
iCS, along with others working in the sector, are not sure when “normal service” will resume, and we know some of our clients have been waiting months in most cases for claims to be settled.
Changes coming into force from April 2023 for R&D tax credits
• All claims to the R&D reliefs – either for a deduction or a tax credit – will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
• Digital claims will require much more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
• Each claim must be endorsed by a named senior officer of the company
• Companies will need to inform HMRC in advance that they plan to make a claim
• Claims will need to include details of any agent who has advised the company on compiling the claim
Submitting claims digitally should make it quicker and easier for HMRC, resulting in more claims being reviewed, processed and potentially more enquiries into claims being launched.
What iCS would like to see from HMRC
Here at iCS we agree that increased compliance with the regulations is necessary, however we’d like to see a better balance and improved communication from HMRC. Our suggestions include:
• Clearer messages from HMRC, communicated in plenty of time
• HMRC should only work with the specialist R&D accountants and professional R&D advisors, don’t put us all in one category and make the whole sector suffer
• Consider providing professional training courses to improve standards – for increased compliance, better knowledge of the scheme and perhaps introducing regulatory standards
• Query any new and repeat claims sooner, and ask clear questions around areas of dispute or indicate where additional information would provide clarification for a claim
• Simplify the scheme rules and the language used to express them. Make the interpretation of them “less grey” so that standards can be more consistent with advice given, both before a claim is made and afterwards when inspectors challenge a claim
• List specific sectors where it is known that R&D claims will be hard to achieve
• Provide realistic processing times to settle claims (and deliver on them)
• Make investigations quicker and less abrasive, as the overall experience process is stressful for the claimant. In recent months, iCS has successfully supported three genuine claimants through an inspection, none of whom will make future claims because they had such a poor experience.
• Make the agents or advisors accountable if consistently poor advice or bad practice is recognised
• Make sure any FIS letters are targeted accurately at the correct recipient and have some specific facts stated to explain why a recipient has received a letter
It’s not all bad news
iCS firmly believe HMRC’s intentions are correct, and we’ll all be better off if the “rogue advisors” and fraudulent claims are eradicated. However, HMRC’s current actions will eventually do more harm than good. Based on our own experience, we think that the R&D service may return to normal before the end of this year but the legislative changes in April 2023 may start the turmoil again. There are many positives for businesses considering R&D tax credits:
• HMRC and government intend to keep investing in R&D tax credits
• The scheme is excellent and flies the flag for UK PLC innovation. It should be encouraged across the board, especially since Brexit and in the face of global trade challenges
• SME businesses remain extremely important to the UK economy as a whole so smaller businesses should be encouraged to innovate at all levels
• Stopping any bad practice in the R&D sector will strengthen the scheme’s appeal and therefore attract the companies that may have been avoiding it
• If a limited company does qualify for an R&D Tax Claim it makes for sensible tax planning, adds value to an accountant’s tax services and they should still take advantage of it and reinvest in future innovation.
Take professional advice on R&D tax credits
If you are a business owner who would like to know more, or an accountant working in the best interests of your clients who are eligible for support, please contact Kevin Johnson on email@example.com, or Paul Wallace on firstname.lastname@example.org. We will be happy to have an open and honest conversation with you.
You can also download a copy of the HMRC R&D Tax Reliefs Report here.
The views and opinions contained within this blog are those of Innovation Cashflow Services (iCS). They are based solely on our own experiences of compiling claims on behalf of accountants and their clients, and representing them when an HMRC investigation is launched.
More about out guest bloggers, Kevin Johnson and Paul Wallace.
Kevin and Paul are directors at Innovation Cashflow Services, who provide R&D tax claim advice, compiling claims and consulting on investigations on behalf of their clients and their accountants. iCS have grown exclusively through successful accountant partnerships and client referrals.
To find out more visit the iCS website or call +44 7508 502 628.