Our responses to the Government’s questions are set out below:
We act for many research-intensive firms who rely on the R&D relief to support continuing investment. These firms rely on and benefit from the additional R&D relief given to continue their significant investment in R&D, which significantly benefits the taxpayer.
We consider that there is a good case for consolidation. The existence of two separate R&D tax relief schemes makes claims difficult to administer for tax-payers and R&D tax agents and there is continual feedback from HMRC, via the RDCC meetings, that claims are being submitted under the wrong schemes leading to incorrectly calculated claims. This feedback occurs principally in the case of small and medium-sized enterprises which claim relief under the SME scheme when they should be claiming under RDEC in respect of subcontracted R&D projects or projects funded by notified state aids.
Incorrectly calculated claims and claims submitted under the wrong schemes are contributing to long delays in the processing time for claims that have been correctly calculated. Such delays penalise genuine taxpayers who are currently having to wait too long to receive their R&D tax benefit. The very point of the R&D tax relief schemes, to incentivise a company to continue to innovate, cannot occur whilst a business is waiting for an R&D tax relief claim to be processed and to receive the benefit.
Concern has been expressed by HMRC historically that there is an increase in the rise of fraudulent claims for R&D tax relief with companies claiming that have not carried out qualifying R&D activity or not incurred qualifying R&D expenditure. There is an increase in the number of HMRC investigations to investigate this activity and prevent fraudulent claims. Amongst the enquiries, there are genuine claims where a company has carried out R&D activity but incorrectly calculated the benefit entitlement. Feedback from HMRC is that this is commonplace where SMEs are claiming for R&D tax relief in projects which involve subcontracted R&D or have received grant funding.
In our view, the existence of two schemes that contain different rules for the calculation of the tax benefit, different rules in terms of qualifying expenditure, and which requires an SME to calculate a claim differently depending on whether it is carrying out subcontracted R&D or in receipt of grant funding- is contributing to the risk of mistakes being made in the computation and presentation of the claim.
There will always need to be a distinction between the type and amount of relief available to companies of different sizes and dependent on the type of R&D activity being undertaken however one set of properly defined rules provides the opportunity to provide increased clarity concerning what is claimable and should lead to an improvement in the quality of submissions.
The definition of what is subcontracted R&D and subsidised expenditure requires urgent clarification. Unifying the current SME and RDEC schemes provides the opportunity to do that.
We consider no reason to depart from the current method of Corporation Tax self-assessment to claim R&D tax relief however this consultation provides an opportunity for reform. During the last few years, there have been some delays in the processing times for claims for R&D tax relief claims which run contrary to the intent and purpose of the schemes.
We consider that a series of measures should be considered to seek to address this. This could involve requiring a company to provide specific information and assurance when submitting the claim in the first place, to accelerate the processing of times for claims but this needs to be balanced with a recognition that too onerous a requirement may deter a company from claiming at all.
Advance Assurance was introduced to provide a guarantee to SMEs making their first claims that those claims would be accepted if agreed with HMRC beforehand and claimed within the first three accounting periods. The feedback from HMRC is that the take-up of the Advance Assurance scheme is not as great as originally envisaged. We consider that some of the reasons for this may include a company`s R&D activity altering during the first three years of trading and the Advance Assurance scheme being unsuitable as well as some companies preferring to submit claims via their accountant or tax adviser.
We do not consider that the Advance Assurance scheme should be abandoned if it is working for some businesses. We have, however, seen no evidence of whether a claim submitted under Advance Assurance significantly accelerates the processing time for a claim.
In respect of claims for R&D tax relief generally, we would have no objection to providing more information and assurance from a client at the point of claiming if there was a firm guarantee from HMRC that the claim would be processed and paid out within a specific timescale.
As to the type of information that should be provided by a company, It may be appropriate to weight this depending on the amount of R&D expenditure included in the claim with less information required for claims including expenditure below a first threshold and significantly more information to be provided for larger claims.
Group 1: Expenditure incurred: <£50,000
Group 2: Expenditure incurred: £50,000-£100,000
Group 3: Expenditure incurred: £100,000-£500,000
Group 4: Expenditure incurred: £500,000- £1m
Group 5: Expenditure incurred: £1m +
We set out below a suggestion of the type of information that could be requested in claims for R&D tax relief depending on the value of R&D expenditure claimed. As demonstrated below, there is a
significant difference between what it would be reasonable for a company to provide, where the expenditure claimed is below £50,000 with the obligation greater as the expenditure increases.
In all cases, we consider that a technical narrative should be provided to support the claim. This should be short-form in claims involving expenditure less than £100,000 and long-form in other cases.
We consider that a precedent R&D short-form and long-form report template should be prepared by HMRC and distributed for consideration. There should be no obligation on R&D tax agents to use these templates with agents free to consider them and modify them for their use but they would help taxpayers and advisors to understand the minimum level of technical information that is required to help HMRC to be able to process the claim.
We suggest that both short-form and long-form technical narratives be supported with a statement of truth, signed by a director of the claiming company, to evidence that the claim has been prepared with an honest belief in the content.
A statement of truth is required for all statements of case, expert reports, witness statements, and certificates of service prepared in civil litigation within the UK as well as applications to the Land Registry. The form of words is as follows:
[I believe][the (claimant or as may be) believes] that the facts stated in this [name document being verified] are true. I understand] [The (claimant or as may be) understands that proceedings for contempt of court may be brought against anyone who makes, or causes to be made, a false statement in a document verified by a statement of truth without an honest belief in its truth.’
A statement of truth is suggested as it provides an additional incentive for a company officer to take responsibility for what is included in the R&D report and submitted to HMRC.
In addition to short-form or long-form technical narratives, consideration might be given to requiring companies to provide additional, supporting information to guarantee the swift processing of claims above a specific value. The type of additional information required might involve a detailed breakdown of the expenditure claimed, sample invoices to support a claim to subcontractor payments, and consumables.
A checklist and requirement to deliver a pack of supporting information may be deemed appropriate for claims of a specific size.
Group 1 claims
Group 2 claims
Group 3 claims
Group 4 claims
Group 5 claims
We would add that should the two schemes be combined, as is being considered, the additional R&D relief for SMEs should be retained.
The responsibilities of HMRC, agents, and the company must be refined and reflected in the claims process. A claiming company must provide clear, complete, and honest information to the adviser to enable the R&D tax relief claim to be prepared. An agent must exercise all necessary due diligence when preparing the claim for R&D tax relief. All claims must be robust, supported by information provided by the client, and prepared in compliance with R&D tax legislation and accompanying guidance.
A claiming company must verify the factual accuracy of a technical narrative prepared by an R&D tax relief agent before submission of a claim and provide clear and truthful instruction to the agent to enable the R&D expenditure to be calculated and the tax benefit to be assessed. HMRC must administer the R&D tax relief claim efficiently and promptly.
These obligations could be emphasised in the claims process in different ways. A company’s obligation could be enforced through the obligation for a company director to sign a statement of truth at the end of the R&D report before the claim is submitted to HMRC. An agent’s responsibilities could be audited through the routine sampling of claims submitted to HMRC.
HMRC’s obligations could be reinforced through the imposition of internal targets concerning the processing times of R&D tax relief claims and a published external commitment to taxpayers.
Advice from HMRC concerning R&D tax relief is currently difficult to access due to internal issues within HMRC. There is a backlog in dealing with the processing of claims and any telephone queries are currently met with an automated message advising the caller not to telephone to chase for updates on R&D tax relief claims on account of the backlog. We consider that HMRC should (generally) be more readily able to respond to email queries. At present, it is often necessary to telephone HMRC only to be left on hold for 15 minutes or more. Businesses and advisers would prefer to email their query and then await a response or call back, rather than sitting on the telephone for long periods. Making references to the website is also not particularly helpful, given how poorly laid out it is and the lack of a useful search function
We would suggest that consideration be given to a dedicated, well-resourced, unit that provides telephone or email advice in response to queries from agents and taxpayers. This would contribute towards the submission of more accurate claims and result in fewer delays in the system.
Consideration could be given to incentivising specific R&D activity that is aligned to the Government’s Industrial Challenge areas: – the aging population, future of mobility etc. Alternatively, the claims handling process could be accelerated for R&D tax relief claims in these areas to enable a claimant company to receive the benefit more quickly and be encouraged to continue with new innovative activity.
An additional incentive could be awarded for innovation in defined areas of technology that the Government wishes to encourage by providing for an enhanced deduction (beyond 130% of qualifying expenditure). There could potentially be a weighting to staff costs when computing a claim to encourage job creation.
Any expenditure that relates directly to R&D should attract additional relief, be it revenue or capital in nature. One example would be where a client has rented premises specifically to undertake R&D. Under the current legislation, any rent paid and relevant rates do not attract additional relief, even though the R&D could not take place without them. This ostensibly arbitrary exclusion of costs that are necessarily incurred to allow R&D to take place may disincentivise investment in R&D/put companies off making claims, which leads to reduced additionality for the taxpayer.
Increased relief for capital expenditure would encourage companies to invest in assets that by their very nature would have an enduring benefit. Currently, there is no additional relief for capital expenditure related to R&D, and for many small companies, they would have sufficient annual investment allowance to attract accelerated relief on any capital assets that qualify for RDAs. This means that for many SMEs, there is a missed opportunity to increase additionality with regards to capital R&D expenditure and additional relief would ensure that investment is directed towards those activities that contribute to R&D. This is subject to RDAs providing capital allowances for expenditure on buildings in certain circumstances that would not otherwise qualify for capital allowances.
We would therefore suggest that a mechanism is created such that capital expenditure on R&D attracts additional relief, even if this is still done via capital allowances rather than in a SME/RDEC claim for expenditure.
Any R&D activity that meets the definition as per the legislation, and where expenditure is incurred in a qualifying cost category, should not be excluded from R&D relief. This is on the basis that the results of any R&D expenditure incurred by a UK company that pays tax in the UK would inevitably benefit the taxpayer.
The BIS guidelines set out what HMRC considers to be qualifying indirect activity in paragraph 31. However, to ensure that a company that is performing R&D can attract relief on all expenditure that has been incurred for R&D purposes, even where it is indirect, HMRC may consider revisiting this list and expanding it.
One example of this would be cleaning costs. Where a company hires a cleaner who spends time cleaning areas/locations where R&D activity takes place, it is indisputable that this cleaner indirectly contributes to R&D in the same way as an employee in the security or maintenance team. However, it is unclear from the BIS guidelines whether a cleaner would be treated as an allowable QIA (per paragraph 31b), or whether they would fall under the overarching exclusion in paragraph 32. Given, as explained above, this activity indirectly contributes to R&D, if the treatment were the latter then this would be an inequitable treatment of necessary indirect activity.
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22 November 2023
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