R&D tax reliefs: Will HMRC’s new scheme make them more accessible?
Donald Drysdale explains why HMRC’s new Advance Assurance scheme ought to bring R&D on to the agenda for some of the UK’s smallest companies.
A helping hand to smaller companies
In his 2014 Autumn Statement, Chancellor George Osborne emphasised the importance to the UK economy of research and development by smaller firms.
Anecdotal evidence suggests that many accountants from smaller companies, and even some tax agents, know little about the R&D tax breaks available. Some are unaware of the reliefs or think they won’t apply to them, while others feel the rules are too complex or the risks of getting claims wrong are too high.
As ICAS pointed out in its consultation response in February 2015, the rules for relief are more complex for SMEs than for larger companies. It was therefore encouraging to read HMRC’s plan ‘Making R&D Easier’, published on 28 October, explaining a new administrative framework to make the reliefs as accessible as possible to all small companies carrying out R&D.
What R&D reliefs are available?
R&D tax reliefs are available to companies but not unincorporated businesses. For revenue expenditure falling within guidelines published by the Department for Business, Innovation & Skills and accounted for as R&D, there are separate schemes for large businesses and SMEs. The scheme for SMEs allows claimants to reduce their income for corporation tax purposes by an extra 130% of their qualifying R&D expenditure – thus allowing a deduction of 230% in total.
Loss-making SMEs have the alternative option of receiving a payable cash credit at a rate of 14.5%. These companies may choose this immediate payment, or carry forward the loss to set against future income.
Many small businesses who have claimed R&D reliefs are quick to endorse how valuable these are. While some are undoubtedly at the forefront of technological advances, others operate in traditional industries where one might not expect innovation to occur. I’ve even heard of a bagpipe manufacturer claiming R&D reliefs on the development of a new process. R&D may be undertaken in the most unlikely of circumstances and accountants should always be alert to such possibilities.
Impediments to R&D claims
In many SMEs and even larger companies, senior managers don’t understand the scope of the R&D rules or may be unwilling to authorise the additional administrative work required to formulate claims.
Where claims arise, it becomes necessary to identify and analyse the R&D spend. Typically, accountants who know the R&D tax definitions speak with engineers or scientists who can describe the technical issues of their leading edge work. Because these groups use divergent vocabularies, it can be hard to identify qualifying R&D which, for tax purposes, must involve a genuine advance in developing scientific or technological knowledge that isn't already commonly available.
Many accountants, trained on principles of prudence, are slow to recognise R&D expenditure. Others claim too much, believing incorrectly that any scientific or technical process which 'looks complicated' must qualify. Failed projects can cause particular problems because research teams may have a vested interest in sweeping abortive costs under the carpet; ironically such failures may arise from the technical uncertainties inherent in R&D work, and therefore are often genuine candidates for relief.
Because many SMEs don’t claim, many accountants have little R&D experience and may not always spot the opportunities. Others fear the intricacies of the rules, well-illustrated by the case of Gripple Ltd v Revenue and Customs Commissioners in which the High Court decided that a director’s salary recharged by another group company didn’t qualify as staffing costs for R&D.
Under the rules on professional conduct in relation to taxation, practitioners and in-house accountants must not undertake professional work which they are not competent to perform. This may oblige them to obtain appropriate assistance from a suitably qualified specialist – perhaps in these cases another accountancy firm with appropriate R&D expertise or a suitable technical or scientific adviser.
What are HMRC’s latest plans?
This month HMRC will launch an Advance Assurance service to help the smallest companies by providing them with greater certainty in making a claim. They will publicise this to raise small business awareness of R&D tax reliefs generally and the new service in particular.
Advance Assurance will focus on smaller companies – those with turnover below £2 million and fewer than 50 employees. It aims to help companies claiming R&D reliefs for the first time, whether they have already undertaken R&D or are intending to do so. It is open to companies with or without a tax adviser. HMRC’s hope of making it equally accessible to unrepresented companies seems ambitious in such a complex field.
Under the scheme, a would-be claimant will be able to discuss their project with an HMRC specialist and obtain an opinion on whether the project is eligible for the relief. A successful applicant who adheres to the scheme guidance (still to be published) will receive assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.
Will the new initiative work?
The introduction of this service demonstrates that the government recognises the complexity of the R&D tax reliefs for SMEs, first introduced in 2000, but this helpful stance has been a long time in coming. In 2011 HMRC ran an Advance Assurance pilot for a limited number of first time small claimants.
Let’s hope that the lessons learnt on the pilot will be put to good use, and that an already over-stretched HMRC will be able to devote the necessary resource to the new scheme to make it work.
Article supplied by Taxing Words Ltd.