HM Revenue & Customs ('HMRC') offers tax relief incentives for businesses that invest in Research and Development ('R&D') activities. This incentive is aimed at encouraging businesses to invest in R&D, which in turn promotes innovation, growth and competitiveness in the UK economy.
To qualify for R&D tax relief, a business must be undertaking a project that seeks to achieve a scientific or technological advance in their field. The project can either be for the company’s own benefit or on behalf of a client. Additionally, the project must involve overcoming scientific or technological uncertainties in order to achieve the desired results.
The amount of relief that a business can claim depends on the type of R&D project and its size. For small and medium-sized enterprises ('SMEs'), the tax relief is worth up to 186% of qualifying R&D expenditure, incurred on or after 1 April 2023.
For larger companies, subject to the 25% corporation tax rate, the Research and Development Expenditure Credit ('RDEC') is worth up to 15% of qualifying R&D expenditure, incurred on or after 1 April 2023.
For accounting periods commencing after 1st April 2024 one merged scheme will be in force and operate under the RDEC scheme.
HMRC has guidelines to help businesses determine whether the company’s project qualifies for R&D tax relief.
Overall, by providing tax relief incentives for R&D, HMRC aims to promote innovation and growth in the UK economy, while also encouraging businesses to invest in scientific and technological advancements that benefit society as a whole. The generous benefit of making an R&D tax credit claim has led HMRC to consider whether the system has been abused and has led HMRC to increase scrutiny of these claims to ensure that they are correct. HMRC have invested in additional resources to check the accuracy of R&D relief claims. As a result, the industry is seeing an increase in both ‘nudge’ letters issued as well as enquiries being opened into R&D claims. It has been reported that 1 in 5 claims submitted to HMRC have either been rejected or are currently under enquiry.
Now, more than ever, it is critical to ensure that you can demonstrate the accuracy of any R&D claims submitted, and that you are prepared to respond to any questions that HMRC may ask on review of the claim. Failure to do so could result in a longer, more detailed enquiry which will require significant resource and delay receipt of any payment. Furthermore, if any errors are identified then you may also be liable to penalties in addition to a reduction in the benefit received.
It is not possible to eliminate the risk of HMRC enquiring into a claim, however these steps will ensure that the company is well placed to respond to any questions and minimise the risk of any penalties being charged for incorrect claims.
To mitigate against the risk of penalties being charged, you need to be able to demonstrate you have taken reasonable care in preparing your claim. Claims under both the R&D expenditure credit and the small or medium-sized enterprise schemes are made under Self-Assessment, meaning that the claimant is ultimately responsible for their claim. If using an adviser, then you need to assure yourself of the quality of the advice being provided and that the information provided to the adviser is fully representative of the activities being undertaken by your business.
What should you do if you receive a letter from HMRC?
Firstly, don’t ignore it. The letter will contain a date that companies need to respond by. The letter is the start of an HMRC enquiry and the most important thing at this point is to treat the matter with urgency and to begin dialogue with HMRC.
Take time to read and understand what information HMRC requires and the course of action it is proposing. Just because you have received an enquiry does not mean that HMRC will reject your claim. The most crucial step you can take is to approach any enquiry with a positive, collaborative attitude and be thoroughly prepared.
How can we help?
If you receive an enquiry from HMRC we can review the claim submitted to HMRC to sense check it for eligibility and robustness and help deal with HMRC on your behalf. We offer advice and support to companies who carry out legitimate R&D activities but have inadvertently been caught up with HMRC’s current determination to assess inaccuracy and fraud with the R&D tax credit scheme.
If you require assistance please do not hesitate to get in touch below.
