The past year has brought about some remarkable changes in the ever-evolving landscape of research and development (R&D) tax reliefs. As we delve into the intricacies of this financial incentive, we will explore the surge in R&D tax relief claims, the role of small and medium-sized enterprises (SMEs), and efforts to combat fraud.
Additionally, we will discuss the complexity of the claiming process, a return to pre-pandemic investment levels, geographical concentration, prominent sectors, HMRC’s countermeasures, and the looming reforms set for April 2024.
R&D Tax Reliefs Surge
Over 90,000 companies contributed to the £44.1 billion of R&D expenditure, with a notable uptick in the utilisation of tax reliefs among Small and Medium-sized Enterprises (SMEs). This surge can be attributed to several factors, including a renewed focus on innovation, driven in part by a return to pre-pandemic levels of investment. However, delving deeper into this financial shift is crucial to grasp the complete picture.
Frauds and Efforts to Combat Them
While the increase in R&D tax reliefs is promising, a dark cloud overshadows this growth: the estimated quarter of SME (Small and Medium Sized Enterprise) claims are believed to be fraudulent. These numbers underscore the challenges that the UK government faces in maintaining the integrity of its tax relief system. In response to these concerns, HMRC (Her Majesty’s Revenue and Customs) has been actively pursuing measures to curb abuse of R&D tax relief.
One of the significant steps HMRC took is introducing a pre-approval form for new claims, which all claimants are now required to use. Early reports indicate that nearly half of the companies failed o complete these forms correctly, raising hopes that these measures could help reduce fraudulent claims. Astonishingly, as of July, it was revealed that a staggering 24.4% of claims within the SME scheme were fraudulent.
Experts commented on this issue: “HMRC has been rightly concerned about error, fraud, and ‘boundary pushing’ when it comes to R&D tax relief and has introduced a number of measures to clamp down on non-compliance.”
Complexity and Scrutiny
Another challenge businesses face is the increasing complexity of the R&D tax relief process. Experts predict higher levels of scrutiny in claims, especially within high-risk sectors. This complexity could deter legitimate businesses from pursuing R&D tax relief as the process becomes more intricate.
Seasoned professionals pointed out, “This return to growth suggests last year’s figures were, at least in part, the result of suppressed business investment in innovation as companies focused on surviving the tough economic conditions of Covid.”
The Regional and Sectoral Divide
The HMRC figures reveal a significant concentration of claims in London and the south-east, with companies registered there accounting for 22% and 15% of total claims, respectively. However, it is essential to note that the location of a company’s registered office may not necessarily align with where R&D activities take place.
Two-thirds of the claims come from three sectors: information and communication, manufacturing, and professional, scientific, and technical services.
The Future of R&D Tax Reliefs
To combat widespread abuse, HMRC is running an educational program targeting areas of the highest risk. They have also increased their workforce dedicated to R&D compliance, adding 300 staff over the past three years.
Looking ahead, there are significant changes on the horizon. HMRC plans to merge the two current R&D schemes into one, based on the existing RDEC (Research and Development Expenditure Credit) scheme, starting from April 2024. However, the proposed changes might mean smaller companies receive reduced benefits unless they qualify as ‘R&D intensive.’
The substantial increase in R&D tax reliefs in the UK paints a promising picture of innovation and economic growth. Nevertheless, the prevalence of fraudulent claims and the growing complexity of the system pose significant challenges. The future of R&D tax reliefs remains uncertain, with reforms and further scrutiny on the horizon.
The UK must strike a delicate balance between supporting genuine innovation and curbing misuse of these incentives to ensure long-term economic prosperity.