New measures have been introduced by HMRC with the aim to reduce the number of fraudulent claims for research and development tax credits by SMEs.
Back in 2018, the Government announced its intention to deter abuse by fraudulent businesses by introducing a cap on the repayable tax credit linked to the total PAYE (Pay As You Earn) and NIC (National Insurance Contributions) bill. The proposal was met with considerable opposition. Two separate periods of consultation followed, resulting in new legislation which took effect from 1st April 2021.
The new R&D cap explained
The new measures limit the amount of the repayable tax credit to £20,000 plus 300% of the company’s total PAYE and NIC liability for the period. This means that companies making claims for a repayable credit below £20,000 will not be affected. Where the cap applies, any losses will be carried forward to be relieved in future profit-making periods. The new cap on R&D claims applies for accounting periods beginning on or after 1st April 2021.
A company will be exempt from the cap if two conditions are met:
- its employees are creating or managing intellectual property, and
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting to connected persons or in paying for externally provided workers from connected persons.
Careful HMRC guidance and supervision is going to be needed to manage the operation of this exception in practice.
Alongside the new cap, there has also been a renewed focus from HMRC on R&D claims, with an increasing number of enquiries. HMRC investigations can be a time-consuming and stressful process for everyone involved. Our advice is to make sure your claim is put together in line with the HMRC rules and regulations, with advice from specialists.
What HMRC are looking for
HMRC requires supporting evidence with clear and concise reports, so you need to demonstrate your understanding of the criteria to avoid your claim being challenged or investigated. A strong technical narrative explains your projects, the features and the challenges you encountered throughout the R&D process and how you made progress with your projects. The technical narrative of your report should be written in a cohesive and coherent way, presenting the company’s R&D work in a way that passes HMRC’s inspection without further questions. It is very important to focus on this part of the application thoroughly.
Don’t leave the cost of an HMRC enquiry to chance
Once HMRC starts an investigation, you are responsible for providing all the information HMRC demands, and it is likely you will need expert help and advice. To safeguard against the threat of enquiry, it’s worth considering a protection policy which covers the cost of fees in the event of a claim. By subscribing to the Tax Investigation Service, the professional fees will be paid for (up to £100,000), so you are able to challenge unreasonable or opaque tax assessments from HMRC.
To find out more about R&D Tax Credits, how to check your eligibility and tips on how to maximise your chances of a successful claim, download our R&D guide.
If you believe you may be eligible to make a claim for R&D tax relief we can help. The first consultation is free and we’ll advise whether or not you have a case for a claim. Our team of experts will then work with you to prepare, submit and monitor the progress of your claim from start to finish.