How well do you know the R&D tax relief scheme – And why it matters
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By Mike Dean, Managing Director at WhisperClaims
The Research and Development (R&D) tax relief scheme in the UK has undergone significant change in the last 12 months or so, presenting both opportunities and challenges for businesses and their advisors.
This space has been a critical area of fee income growth for many practices in the past few years, but many firms may now be struggling to keep up with the pace of change, while many others may be avoiding providing an R&D tax service altogether due to increasing complexity and uncertainty.
It is not surprising given that the last year has seen the introduction of the Additional Information Form (August 2023) and further considerable changes from April 2023 – including alterations to the rate at which relief is paid – and on the horizon, the impending consolidation of the RDEC and SME schemes.
April 2023: A New Chapter:
The amendments to the R&D tax rules in April 2023 complicated the scheme even ahead of the introduction of the Additional Information Form (AIF).
This included changes to the rates of relief, which prompted a reassessment of business strategy for many advisors as they assess the benefit of each claim, the fees they can charge and the added risk of HMRC enquiries.
The changes negatively impacted the tax benefits that SMEs receive and have also required a more nuanced understanding of the qualifying criteria and the claim process, as HMRC tightened its policing of the scheme.
The introduction of these measures along with the impact of the AIF has compelled advisors, especially those in small to mid-sized accountancy firms, to swiftly adapt and improve their claims management practices.
The ever-shifting sands of R&D tax relief
Following the introduction of the Additional Information Form, an alarming 50 per cent of claims were rejected during its first month due to non-compliance.
This statistic alone underscores the need for meticulous attention to detail in the claims process and is a demonstration of HMRC’s renewed vigour when it comes to policing the scheme. In fact, across the last twelve months, HMRC’s increasing vigilance and adoption of a “scale approach” (HMRC’s term for their one-to-many email comms campaigns) have all had a significant impact on the dynamics of the market.
The latest HMRC statistics from earlier this year showed a five per cent increase in claims in 2021/22 (this will increase by the time the next reports are published due to the lag in data capture associated with the scheme). This is in stark contrast to what we see “on the ground”- where the increase in complexity, uncertainty surrounding the direction of the scheme, and a huge shift in HMRC’s focus on compliance have all led to a significant drop in the number of claims in the past 12 months. Worse still, the squeeze on the rates associated with the changes to the scheme have led many smaller providers to leave the market altogether. This has been especially true with regards to smaller specialist consultancies.
Whilst on the face of it this all appears to represent bad news, there is in fact light at the end of the tunnel. This market squeeze has led to SMEs finding that support for their claims has diminished – abandoned by their previous suppliers, they are reaching out and looking for help. And who will they turn to first? Inevitably, it’s their accountant!
We are seeing increasing numbers of accountancy firms now looking to either find ways of supporting this part of the market for the first time, or simply looking for efficiencies in their existing processes and a shoulder to lean on when it comes to understanding the new regime.
For many firms, this is becoming an area that is hard to miss or ignore as clients themselves seek support. In fact, as a provider of R&D tax support and software, we have seen the number of sales leads we receive increase and have had a record year for webinar attendance as we educate the industry on these latest changes.
HMRC’s New Guidance: Bridging the Knowledge Gap:
In recognition of these challenges, HMRC issued new Guidelines for Compliance (GfC3) to bring advisors up to date on what does and doesn’t comply with the scheme.
This comprehensive framework is a response to HMRC’s analysis and evaluation of claims via the scale approach referenced above and is based on their assessment of where advisors have consistently been making errors in preparing claims. This work identified that approximately half of claims exhibit some form of non-compliance.
This guidance serves as a crucial resource for practitioners, emphasising the need for continuous professional development and staying informed.
The Merger of R&D Tax Schemes:
Looking ahead, the recent Autumn Statement announced the merger of the R&D Expenditure Credit (RDEC) and Small and Medium-sized Enterprises (SME) schemes, and this is set to be a game-changer.
For accounting periods starting on or after 1 April 2024, the consolidated scheme will enable all eligible businesses, irrespective of their size or revenue, to claim a 20 per cent relief on all qualifying R&D expenditures. Furthermore, for loss-making companies, the notional tax rate will be lowered from the main rate of 25 per cent to the ‘small profits’ rate of 19 per cent in April 2024. This adjustment aims to provide more support to these businesses.
Whilst this consolidation aims to streamline the process, it also brings with it a new set of complexities. Accountants and advisors must familiarise themselves with the intricacies of the merged scheme to ensure that their clients can maximise their benefits without falling foul of the regulations and at the same time will have to manage the fact that the existing SME and RDEC schemes will still be operational for earlier accounting periods – this overlap will exist for a further two years until the “tail” of earlier claims is worked through.
It’s a perfect example of the law of unintended consequences, but this period of overlap and further increased complexity is set to be temporary – in the Autumn Statement, the Chancellor declared that the review into the scheme is complete – so we can at least hope for a period of stability as far as the legislation is concerned. This gives the market a window of opportunity in which to get on top of these changes and to deliver value to clients again.
The knowledge gap
Despite, or perhaps due, to these developments, a knowledge gap persists among many accountants and advisors, which is seemingly widening with each new development. This gap is not just in understanding the specific changes but also in the broader strategic approach required to navigate R&D tax relief effectively.
Common pitfalls include a lack of thoroughness in documentation, misinterpretation of what constitutes R&D activities, and a failure to keep pace with HMRC’s changing stance and requirements.
We are seeing increasing numbers of accountancy firms leveraging technology and outside support to keep on top of these changes, to offer a compelling and value-added service to their clients and to do this efficiently under their own brand.
If you’d like to know more about how WhisperClaims is helping accountants to deliver R&D tax claims more effectively, why not join one of our regular App Showcase webinars?
If you’d like to know more about how WhisperClaims is helping accountants to deliver R&D tax claims more effectively why not book a personalised 1-2-1 demo ? Or join one of our upcoming product showcase webinars