It is rare for areas of the law to be subject to the level of wholesale revision that R&D tax relief has experienced over the last few years. Since March 2021, when the initial consultation on reform was published, a raft of changes has been implemented, culminating in the creation of a merged scheme for accounting periods beginning on or after 1 April 2024.
One of those changes – the introduction of a mandatory Additional Information Form (AIF) – took effect on 8 August 2023 and applies to all claims submitted on or after that date. In the 12 months since its implementation, what have we learnt and is there room for improvement?
Original aims
The AIF’s introduction formed part of the government’s overall aim of raising standards in the R&D tax relief sector. While the vast majority of R&D tax consultancies take immense pride in delivering robust claims, concerns have been raised about the standard of claims submitted by less reputable advisers. HMRC’s enquiry level has risen correspondingly, and, in part, the AIF has been designed to help support that by capturing better quality information at the point of submission.
By having improved information in a prescribed form, HMRC should be able to triage and review claims, as well as identify any common themes. For example, if the same agent repeatedly crops up in enquiry in relation to a specific error, HMRC will have an opportunity to provide targeted education and guidance, and, in so doing, drive up industry standards.
How does it work?
The AIF needs to be submitted to HMRC in advance of a Corporation Tax return containing an R&D claim. Without it, HMRC will not be able to process the claim and that claim will be refused.
In practice, the AIF is less a form and more a series of questions answered via a portal on the gov.uk website. It captures basic company information such as the company name, unique taxpayer reference, VAT registration number, employer PAYE reference number and Standard Industrial Classification code, as well as the accounting period for which relief is being claimed and the type of relief sought.
It then requires the contact information for the senior person within the company responsible for the claim and any agent involved in preparing it. While on the face of it small, this detail is key. It provides an opportunity for someone senior within the company to ensure that they’ve reviewed the claim, acknowledge that they have been involved in its preparation and, ultimately, take responsibly for it. This avoids any surprises later down the line as to the scope of the claim. It will hopefully put an end to cases where rogue agents have submitted claims with little input from, or even without the knowledge of, the company the claim is made on behalf of.
Next is a summary of qualifying expenditure by cost category, with qualifying indirect activities separated out. To provide context, the AIF only requires the total value being claimed under each qualifying category, e.g. one number for the total staff cost claimed, one number for the total subcontractor cost claimed etc. The form does not ask for breakdowns of these figures or any detail of how they have been arrived at.
The AIF also requires project details, including the number of projects being claimed for in the accounting period and descriptions (or case studies) of the activity undertaken. The number of case studies required will depend on the number of projects being claimed and typically varies between one and ten. For example, for claims including one to three projects, details should be provided for all projects; and for claims including four to ten projects, details should be provided for projects giving at least 50% coverage of qualifying expenditure, with a minimum of three.
The total qualifying expenditure being claimed for each project must also be specified, and loss-making R&D-intensive SMEs must include details of their total relevant expenditure, as well as the relevant R&D expenditure and total relevant expenditure of any connected companies.
How effective has it been in practice?
Despite initial teething problems, the AIF is a welcome addition to the legislative toolkit and one that we support. For most shrewd R&D tax advisers, the changes merely represent the codification of an existing process of demonstrating the R&D and linking it to the qualifying expenditure.
Of all the changes, however, the case study requirement has perhaps had the most significant effect in practice. The AIF ensures that claiming companies and advisers produce a specific number of project descriptions, in most cases providing coverage of at least 50% of the costs included in the claim. On one hand, this elongates the process and inhibits flexibility, yet on the other, it ensures that a consistent standard is applied across the board and that there is a demonstrable link between the costs being claimed and the R&D activity which has taken place.
For all the positives though, it’s worth highlighting a missed opportunity. The AIF fails to require any information on the competent professional (CP) to be specified. As all advisers involved in R&D tax relief will know, it’s impossible to have a valid R&D claim without a relevant CP. In fact, so central is the CP to the process that supporting information previously given to HMRC would likely have included detail on the CP. This would have been accompanied by an explanation of the methodology employed in identifying the qualifying R&D activity and associated costs, and a detailed breakdown of those costs. Since the AIF doesn’t require any of this, there’s an argument that in its rigidity, less information is being given in certain circumstances than would otherwise have been the case.
This is surely an opportunity for a future iteration of the form. Afterall, companies are still able to submit a separate report if they feel it is necessary to provide any information not required in the form. If this is HMRC’s way of acknowledging that there are gaps in the detail required for the AIF, perhaps going forward a better solution would be to identify those gaps, decide what additional information it needs to properly assess a claim and build it into the AIF.
Going forward
One year on and the AIF has generally been well received by those advisers – ForrestBrown included – who have long been calling for better quality information and better regulation of the market.
The AIF doesn’t require any more information than we were already asking for or supplying. The question now is how HMRC will use this information going forward. There is a golden opportunity to utilise it in the risk assessment and enquiry process: to produce more targeted questions that will make the entire process more streamlined. There is also the potential to identify commonalities and weed out repeat offenders. To date, it’s hard to know whether and to what extent this is happening, but it must surely be an area to deploy greater resource and vigour going forward.
The AIF means that HMRC has a wealth of information about R&D claims at its disposal; the challenge now is to use it effectively. In another 12 months it would be wonderful to look back again and say that the AIF not only achieved its aims, but far exceeded them.
Do you need AIF support?
ForrestBrown has a wealth of experience in preparing and submitting R&D tax relief claims to HMRC. If you need help or advice, do get in touch.