As the government continue to recognise that investment in R&D and innovation helps drive economic growth, this has been reflected in their long-term target to invest 2.4% of GDP in R&D by 2027.
R&D tax reliefs are one of the instruments the Government use to stimulate R&D, however they are keen to ensure the reliefs are properly targeted and not abused.
The government use R&D tax reliefs as an instrument to stimulate R&D, although are keener than ever to ensure the relief is correctly targeted and not abused.
Accountants need to be aware of the main issues relating to R&D tax credits that may impact their clients:
R&D tax reliefs have had little change since their introduction in 2000. The Autumn Budget 2021 saw the Government announce welcome reforms to support modern research methods by expanding qualifying expenditure to include data and cloud costs.
The Government is acting to ensure the UK captures the benefits of R&D funded by the UK taxpayer through the reliefs, refocusing government support towards innovation by restricting previously allowable overseas costs. This was not possible while part of the EU.
The key issues with R&D tax credit investigations and ‘spurious’ claims?
The ever-increasing number of spurious R&D claims has prompted the Government to act, whilst not discouraging companies making genuine claims.
The SME cap on R&D tax credits linked to PAYE/NIC, introduced in April 2021, was designed to combat abuse of the scheme by companies with limited UK presence.
There also appears to have been an increase in HMRC enquiries. For a number of years, HMRC adopted a light touch approach with few disputes reaching First Tier Tribunal. Recent cases ruled in favour of HMRC show HMRC’s hardening stance and a willingness to challenge R&D claims.
The Government will also set out plans to tackle abuse and improve compliance with the R&D tax reliefs later in the autumn.
Will the recent changes to R&D tax relief impact the way business can claim, including future levels of scrutiny and over all scope of available tax relief?
With increased scrutiny from HMRC, it is important that businesses engage with specialists to ensure claims are properly considered and justified.
The potential removal of overseas costs from R&D claims is significant and although the devil will be in the detail, there will be planning around commercial considerations vs tax relief.
These changes will be legislated for in Finance Bill 2022-23 and take effect from April 2023.
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