The Finance Bill 2021 introduced changes to the criteria for the research and development (R&D) tax credits scheme. The new rules have been designed to prevent fraudulent tax credit claims that ultimately prevent small and medium enterprises and start-ups accessing funding designed to encourage them to innovate.

The R&D tax credit scheme has an important role to play in the UK’s recovery from the COVID-19 pandemic and the Government continues to offer funding to innovative companies through R&D tax credits.

However, it has recently been well documented that the system has been increasingly abused by rogue claims that were accessing these incentives despite having no clear R&D activity whatsoever and potentially reducing the available funds for genuine companies.

From April 2021, a new R&D SME tax credit PAYE cap will come into force to curb fraudulent claims. The cap will limit the payable R&D tax credit to £20,000 plus three times the total PAYE and NIC liability of the company for the year.  Companies claiming below £20,000 will be unaffected, so small businesses that truly need funding are not restricted.

The claim

A robust claim will need to consider the following:

– Assessment of eligibility: For example, to ensure correct analysis of SME (small or medium sized enterprises) status, correct treatment of R&D expenditure where the company has received grant funding.

– Identification of R&D activity: Identifying R&D activities in accordance with the BEIS guidelines on the meaning of R&D for tax purposes, including preparation of accurate descriptions of projects, project aims and activities.

– Identification of eligible expenditure: Assessing qualifying expenditure in accordance with relevant legislation, ensuring non-qualifying cost categories are excluded, correct classification of claims being made for capital expenditure and revenue expenditure, correct analysis of externally provided workers, subcontractors and support staff, correct calculation of staff costs category, e.g.  including employer NI contribution or employer pension contributions or including benefits-in-kind as applicable.

– Calculation of the claim: Correctly calculating the claim benefit, and disclosures in the CT600, consideration of surrendering losses for a payable credit in respect of other reliefs that have already been claimed, consideration of the interaction of claiming expenditure so not incorrectly included in other claims, for example a capital allowances claims.

– Supporting the analysis: Ensuring sufficient supporting analysis or records, for example of staff time to show where allocations have come from, ensuring correct allocation of costs between projects and return periods.

Summary

It is therefore important to consider:

1. Descriptions or explanations of R&D activity included in a claim.
2. Claims preparation based on sufficiently detailed analysis and not only on the accounts.
3. Consideration of the potential consequential impacts of the claim.

We continue to work with our clients to maximise such reliefs within tax law and HMRC practice, and encourage a thorough understanding of the scheme necessary to create an economic environment in which is innovation is encouraged. We note that HMRC will look to charge penalties on claims which they think have no merit, so getting this right is important.

For further advice in this area, please do not hesitate to reach out to your Barnes Roffe contact for further information.