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Reducing the level of non-compliance in R&D tax relief schemes is a priority for HMRC. In this article, we share HMRC's latest guidelines for compliance with R&D tax reliefs
The UK Government is keen on fostering innovation in the fields of science and technology through its Research and Development (R&D) tax relief schemes, which form a crucial part of its economic growth strategy. Administered by Her Majesty's Revenue and Customs (HMRC), these tax reliefs aim to be timely and effectively targeted to aid companies working on groundbreaking projects.
HMRC operates two tax relief schemes catering to different company scales. The first is designed for small and medium-sized enterprises (SMEs), while the Research and Development Expenditure Credit (RDEC) scheme targets large corporations and others that do not qualify for the SME relief.
According to HMRC data, the number of R&D tax relief claims has been increasing annually. In the fiscal year 2015-2016, a total of 43,665 claims were filed, amounting to £4.0 billion. By 2020-2021, these figures had escalated to 89,300 claims worth £6.6 billion. HMRC predicts that by 2027-2028, the cost of the relief for claims received could reach £9.5 billion.
The eligibility for R&D tax relief is contingent on the work being part of a specific project designed to advance science or technology, based on internationally recognised standards. Projects ineligible for these tax reliefs include those in the fields of arts, humanities, and social sciences, including economics. Furthermore, the R&D project must be relevant to a company's trade, whether existing or intended to start based on the research outcomes.
For a project to be deemed compliant and qualify for relief, a company must demonstrate that its project seeks to make a significant contribution to its field by addressing a scientific or technological uncertainty. Such projects may involve researching or developing new or improved processes, products, or services. The project should aim to overcome an identified scientific or technological uncertainty and could not be easily resolved by a professional in the field.
However, the government also recognises the importance of safeguarding taxpayers' money. Hence, there's a need to balance the efficiency of the relief claim process and ensuring that only eligible entities benefit from the schemes.
HMRC has also shared its latest analysis on non-compliance within R&D tax relief schemes from claims relating to 2020-2021 and detailed its compliance approach to R&D in a recent document. This move seeks to ensure transparency and adherence to the rules of these relief schemes.
In response to growing concerns over the misuse and manipulation of Research and Development (R&D) tax reliefs, particularly among Small and Medium-sized Enterprises (SMEs), the UK government has initiated various actions to increase compliance and protect taxpayer money.
The government launched a review of the R&D tax relief schemes in 2021 amid an increasing number of claims, which inherently come with risks of fraudulent claims. Her Majesty's Revenue and Customs (HMRC), despite risk triaging all claims, can only conduct a detailed examination of a limited number.
To better comprehend the degree of non-compliance, HMRC introduced a mandatory random enquiry programme (MREP) targeting SMEs claiming under the SME scheme or R&D Expenditure Credit (RDEC). This approach involves randomly sampling claims to get an accurate estimate of non-compliance levels.
Several reforms were announced in 2021, 2022, and 2023 to reduce non-compliance. Some of these measures have already been implemented and are showing results. Over the last three years, HMRC has doubled the number of personnel working on R&D compliance, including an additional 300 individuals dealing with non-compliance.
In July 2022, HMRC established a dedicated R&D Anti-Abuse Unit, focusing on dealing with incorrect claims and opening enquiries into the most complex cases. Efforts by this unit have blocked £85 million in fraudulent claims and resulted in nine arrests.
HMRC has implemented additional measures, including payment identification and verification controls for all claimants. Despite these enhanced security measures, HMRC maintains its objective to process 85% of payable claims within 40 days.
Furthermore, the government announced new policy measures to counter non-compliance, including digital submission of all claims, provision of additional information with each claim, reducing the payable relief amount in the SME scheme, and other requirements. These changes are expected to take effect from August 2023.
In addition to these operational and policy changes, the government has undertaken proactive outreach to customers who are new to R&D regimes and to those in sectors with limited opportunities for compliant claims.
The government acknowledges the essential role that R&D and innovation play in the economy and society, and further support was announced at the Spring Budget 2023 for the most R&D intensive loss-making SMEs. These efforts are aimed at ensuring that taxpayers’ money is effectively utilised to support innovation while protecting the integrity of the tax reliefs. The government will continue to review and consider reforms of these schemes.
HMRC (Her Majesty's Revenue and Customs) has outlined its compliance strategy for the R&D (Research and Development) tax reliefs, designed to assist businesses in correctly paying their taxes. This strategy aligns with the aim of ensuring that businesses understand their tax obligations and are guided through the process to avoid errors.
This approach comprises four main elements. Firstly, HMRC seeks to educate and support businesses while simplifying the claim process. The second component involves taking proportional measures against non-compliant claims. These responses range from large scale interventions for simpler non-compliance cases to launching criminal investigations for cases of substantial abuse.
Thirdly, HMRC is set to work in close conjunction with tax agents to elevate their professional standards and enhance HMRC's guidance, communication, and insight. Decisive actions will be taken against agents found to misuse the tax relief system.
The fourth component of the strategy includes enhancing HMRC's understanding of claims and applying sophisticated risk analysis techniques to a broad range of data and information.
A notable trend identified by HMRC's analysis is that the majority of non-compliance incidents are associated with SMEs (Small and Medium-sized Enterprises) rather than large businesses. Consequently, the outlined approach predominantly focuses on this group of taxpayers.
While the same compliance principles apply to both large businesses and SMEs, the Large Business Directorate oversees around 2000 of the UK's most significant businesses. Each of these businesses is allocated a Customer Compliance Manager who is supported by a team of tax professionals. This model aids in ensuring that businesses pay the right amount of tax at the right time and reduces the risk of non-compliance in R&D claims. As a result, non-compliance rates among large businesses claiming RDEC (Research and Development Expenditure Credit) are significantly lower.
HMRC's Research and Development (R&D) compliance strategy is focused on providing businesses with the tools to get their tax right the first time, decreasing the chance for errors. This preemptive approach, referred to as 'upstream' compliance, comes as a response to data that suggests a significant portion of R&D non-compliance arises due to errors.
In light of this, HMRC has implemented an array of educational initiatives like informational campaigns, enhanced guidelines, and webinars. This year, they'll be rolling out additional measures to better target these supportive efforts, focusing particularly on the highest risk areas.
To improve oversight, from August 2023, claimants will be obliged to inform HMRC of the agent involved in formulating their claim, allowing the department to target activities on agents who submit non-compliant claims more effectively. For businesses making their first claim or returning after a long break, a new rule effective from April 1, 2023, mandates these companies to notify HMRC about their intention to make an R&D claim within six months of the end of that accounting period. This measure will offer clearer guidance and protection against fraudulent agents.
When non-compliance isn't preventable through these proactive measures, HMRC uses targeted interventions that align with the level of risk and customer behavior. They undertake detailed examinations of claims that appear to have complex non-compliance issues, employing specialist staff, including the newly established R&D Anti-Abuse Unit. Furthermore, from August 2023, claimants will be required to provide more in-depth information when making a claim, enhancing HMRC's ability to deliver targeted interventions.
Tax agents, who represent over 90% of claimants, are a crucial part of the R&D tax reliefs scheme. HMRC is committed to maintaining an open dialogue with them, recognising the value of their insights on common errors and challenges in the claim process. However, HMRC will take decisive action against agents abusing the R&D reliefs in line with their approach to agent misconduct.
To better analyse risk and non-compliance, HMRC will increase the data it receives on individual claims from August 2023. This augmented data collection will provide more detailed insight into R&D activity, expenditure, agent behavior, and business contacts, thus significantly improving the risk assessment process. HMRC will also continue to gather feedback from customers through various channels, which will further inform their compliance strategy.
HMRC will share a further update on this approach to improving compliance with R&D tax reliefs in winter 2023, as part of its formal response to the Public Accounts Committee on this issue and any further changes will be announced at a future fiscal event.
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