What are R&D tax credits?
Research and development tax credits are a multi-billion-pound incentive scheme, intended to encourage innovation, by allowing companies to reclaim some of the costs of their science and technology projects.
Has HMRC tightened up too much?
The incentives are generous and cost the UK about £8 billion a year. In recent years, concern about large scale fraud and error in the system has prompted HMRC to change some rules and expand its R&D compliance team to over 500 staff. As a result, it has been scrutinising more claims, more thoroughly and it has become more demanding for companies to make claims.
Businesses and entrepreneurs have complained that increased checks have made the system too difficult to access for genuine claimants.
Latest developments
In March, the government launched a consultation on making claimants in certain sectors seek advance assurance from HMRC that their project would qualify for R&D tax relief before they filed their claim. The government said its mandatory advance clearances proposal could provide certainty for businesses as well as further reduce fraud and error. The consultation runs until 26 May 2025.
Ask Mark…
Mark Graves is an R&D tax credit specialist and partner in the Innovation Tax team at business services provider AAB. Mark primarily works on the technical analysis of R&D claims and preparing technical reports to support his clients applications, he is also experienced in handling HMRC investigations.
We asked Mark to give us the lowdown on R&D tax credits and highlight some of the particularly tricky areas:
“The field of R&D tax credits has attracted unregulated advisors who encourage clients to make claims when they may not bet eligible and potentially miss opportunities to claim when clients are eligible.
These are highly technical and complex claims where there are potentially large amounts of money at stake. Making a successful claim can be the difference between survival or failure for a business – so it really does pay to invest in specialist input, as early in the process as possible, ideally before contractual documentation is signed, so that advice can be given and relevant provisions included.”
Mark highlighted the following issues to look out for:
- To be eligible for R&D tax credits you must be seeking to make an advance in the fields of science and technology which requires seeking to resolve a scientific or technological uncertainty. Simply developing a new product may not satisfy those requirements.
- An R&D tax claim is not the same as pitching a new product. The technical evaluation of what you are developing will be crucial and the rules state that any advance you are relying on should not be obvious to a competent professional in the field – it’s a high hurdle.
- HMRC have 1 year from the date of submission of a claim to investigate and can demand tax credits be paid back (possibly with interest and penalties) at the end of their investigation (which may go on for many months). This power of claw-back causes financial uncertainty and can have a detrimental impact if you are looking to raise finance as it could be a red flag to an investor. Similarly, on exit, you may be asked to give indemnities in respect of any previous R&D tax claim.
- Where you are outsourcing or working with a sub-contractor, the question of who is entitled to claim R&D tax credits can be tricky. The rules in this area have changed significantly (for accounting periods starting on or after 1 April 2024) but, it’s important to understand who is eligible to claim and price this into the contract accordingly.
- Whether or not an employee’s contract provides that they are actively responsible for managing IP could be the difference between a claim being allowed or not so take care to make sure your employment contacts are properly tailored.
- With a few exceptions, overseas R&D costs are no longer allowable (again, for accounting periods starting on or after 01 April 2024). However, it worth taking advice to see if you fall within an exception, e.g. where it can be demonstrated that it was not practical to undertake the R&D within the UK.
- A poorly worded contract, for example for prototype manufacturing of pharmaceuticals, could result in HMRC disputing whether a consumable good or subcontractor service is being provided – only the former can be claimed at 100%.
- If your development is taking place overseas, it’s critical to make sure any supplier contracts are effectively drafted from the outset. This is because a subcontractor cost would generally be ineligible for relief, but provision of a consumable for subsequent R&D back in the UK would generally be eligible.
Mark Graves has extensive experience handling HMRC enquiries into R&D tax claims, successfully defending and in some cases, even increasing the value of client claims. If you want to discuss your R&D claim with Mark and his team, you can get in touch on mark.graves@aab.uk
