Claiming R&D relief is about to get more complex | Guest post by BDO

BDO is an Associate member of the CPA.

Research and Development tax relief is vitally important to the manufacturing sector, with the latest available figures showing that 18,500 small and medium-sized manufacturing firms applied for £820m in relief in 2020-21. Yet recent developments herald important changes to the operation of the R&D regime which have significant implications for innovative firms – including businesses in the construction products sector.

In a recent report, HMRC estimated that the overall level of error and fraud for both of the current R&D tax relief schemes - SME and R&D expenditure credit (RDEC) - across all sectors of the economy amounted to an alarming £1.13bn, equivalent to 16.7% of claims. This was significantly higher than its previously published estimate of 3.6%.

Analysis also found that almost a third (31%) of R&D claims by manufacturing SMEs were judged as either wholly or partially non-compliant.

To address the issue of fraud and error, a range of new checks have come into force from 8th August 2023. Claimants or their R&D advisers are now required to fill in an Additional Information Form which is designed to allow HMRC to quickly assess the validity of any claim along with the identity of the R&D agent used to prepare the claim. This is to help the tax authority to assess the expertise involved in the claim.

HMRC has also risk-profiled claims across the different business sectors by size of claim and increased the number of inspectors opening R&D claim enquiries.

While the level of non-compliance among manufacturing businesses is relatively low when compared to businesses in other sectors, the high numbers of claims for R&D tax relief from manufacturing companies will mean the sector will continue to be under close scrutiny by the tax authority. Many businesses suspected of non-compliance may also find themselves subject to a formal HMRC enquiry.

Businesses that receive such an enquiry should always take expert advice from specialists in dealing with R&D investigations who are regulated by one of the accountancy or tax institutes. Those that don’t often end up regretting it as these can be complex investigations and involve serious issues that can have a wider impact on a business’ relationship with the tax authority.

While it is absolutely right that HMRC should clamp down on fraud and error, some have expressed concern that the upcoming changes will dissuade firms from pursuing legitimate claims.

Clearly, these upcoming changes will mean more red tape, but construction product businesses engaged in qualifying R&D activities should not be put off from claiming the benefit to which they are entitled. However, they will need to plan more carefully and put in place new processes to collect the right information, first time, to support their claims.

Looking further ahead, the Government is currently consulting on more significant reforms to the R&D regime, notably by merging both current schemes - the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme for large businesses - into a single scheme from 1 April 2024.

In the long term, there may well be practical benefits to aligning the way R&D relief is claimed. For example, the combined scheme would be based on the current RDEC rules which help to raise the prominence of the R&D function within a business by recognising the R&D incentive in a company’s pre-tax income.

However, given all the recent changes to the R&D regime – the introduction of new rates from this April and the new claim requirements which come into force from August – creating yet more uncertainty could risk turning innovative businesses away from investing in the UK.

While a final decision on this merged scheme will be taken at a future fiscal event, it may be wiser for these proposed reforms to be delayed until at least 2026. This would help to reduce the risk of damaging the important R&D investments that this relief is supposed to support.

For advice on your R&D tax claims and the changes coming into force, please get in touch:

Steven Levine, National Head of R&D at BDO LLP
0203 860 6197

Conor Mansfield, Associate Director of R&D – Real Estate, Infrastructure & Construction at BDO LLP
079 8570 4994