The UK’s Research & Development (R&D) regime is showing signs of weakness following a suspected uptick in the amount of relief overclaimed by the country’s largest companies, according to industry experts.
“The guidance is the same for every industry and sector so that makes it a challenge for HMRC to try and apply it to each unique set of circumstances across all different industries,” says James Clark, associate director incentives and reliefs, at Markel Tax.
“They can ask the routine questions, but when it comes down to the nuts and bolts of whether this is a technically qualifying project, it’s open to interpretation.”
According to national accountancy group UHY Hacker Young, it is estimated £725m in R&D tax relief was overclaimed in the 2020-21 tax year. This represents a 16% jump on the £623m suspected to have been overclaimed the year prior.
But for Kevin Edwards, tax partner at UHY Hacker Young, HMRC will now step up its enforcement activity and adopt a “laser focus” on spurious R&D claims.
“Submitting an R&D claim is going to get a lot trickier as HMRC looks to clamp down on error and fraud,” he says.
“Before submitting an R&D claim, it is always better to seek professional tax advice from a qualified accountant. Otherwise, a business is opening itself up to a time-consuming and costly HMRC investigation and may have to pay back significant amounts of tax.”
UHY’s estimate is a calculation based on three figures: the total amount spent on R&D by the UK’s largest companies (as reported by the ONS); the total amount of R&D tax relief claimed (as reported by HMRC); and an additional 3.2% to account for “error and fraud” (as recommended by HMRC).
HMRC officially estimates the amount overspent to be £311m, as per its annual report.
Markel’s Clark argues HMRC faces a fundamental dilemma – while it is dutybound to stamp out unlawful practices, it also has a vested interest in encouraging claims.
“The challenge for HMRC is that they are obviously responsible for collecting and managing it, but the narrative from successive governments has been that they want to encourage innovation and investment in R&D,” he says.
As part of its Innovation Strategy, the UK government intends to increase total R&D investment to 2.4% of GDP by 2027.
As a result, Clark argues that it currently falls to clients to impose greater scrutiny and question the practices of “aggressive providers”.
“The fact that it’s a complex system allows advisers to capitalise, so the best you can hope for as a client at the moment is to check that your adviser is operating in accordance with the professional guidance,” he says.
An imperfect R&D regime
However, as per Chancellor Rishi Sunak’s 2022 Spring Statement in March, a tightening of the R&D rules is set to come into effect.
As of April 2023:
- Claims will need to be endorsed by a named senior officer of the claimant company
- Companies planning to make a claim will have to notify HMRC of their R&D activity on the day it takes place
- Companies will have to provide details of any agent advising them on the claim
As part of what Sunak dubbed a “new culture of enterprise”, the scheme will also be expanded next year to include data, cloud computing and pure maths.
“Something is not working,” the chancellor told UK lawmakers during his statement in March, lamenting that the amount UK businesses spend on R&D as a percentage of GDP is just 1.74% – less than half the OECD average.
The industry now expects a summer consultation period to follow, with a view to determining the definitions and mechanics of the changes.