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Guidelines for compliance: understanding and implementing HMRC's new R&D tax relief guidance

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The recent release of HMRC’s Guidelines for Compliance (GfC) for Research and Development (R&D) tax relief is a positive step toward enhancing awareness and understanding of identifying R&D for tax purposes.

While the initial response to the guidance may have been overshadowed by the Autumn Statement announcements and HMRC’s ongoing compliance campaign, its significance lies in providing businesses with a valuable resource to navigate the complexities of R&D tax claims.

The new guidance sees HMRC set clear expectations for companies seeking to claim R&D tax relief. All businesses and advisers engaged in R&D activities should take note of this development and consider the following key points.

Changes to R&D tax relief from 1 April 2024

SME R&D tax relief and the Research and Development Expenditure Credit (RDEC) will be merged for accounting periods beginning on or after 1 April 2024, although an enhanced rate for R&D intensive SMEs will continue to be available.

The merged scheme moves to a single rate and set of qualifying rules with elements from the existing two schemes, including clarification of subcontracted out and subsidised R&D. Restrictions on overseas R&D also come into force from 1 April 2024.

ForrestBrown’s expert team is on hand to help businesses understand what these changes will mean and what they can do to prepare.

Looking for help or advice around the changes to R&D tax relief in 2024?

The importance of clear guidance

Recent years have seen HMRC flag increasing concerns regarding error and fraud in R&D claims. An investigation seeking to better understand the situation concluded that error was more prevalent than abuse or fraud, despite HMRC now preferring the term ‘non-compliance’ as a catch all term.

Many stakeholders have called for clearer guidance to help address errors. Helping companies to get things right in the first place is far preferable and more cost efficient than correcting mistakes via retrospective compliance checks. HMRC guidance also helps to set clear expectations between HMRC and those claiming relief, reducing the risk of lengthy disputes over interpretation, particularly when it comes to the meaning of R&D.

Clear guidance fosters consistency, reduces errors, and minimises the risk of retrospective adjustments during compliance processes. A win for both HMRC and taxpayers.

What the new HMRC R&D guidance is aiming to achieve

The GfC are a series of targeted guidance resources on complex areas of tax, or where HMRC has seen a high proportion of errors. The R&D GfC primarily focus on interpreting the Department for Science, Innovation, and Technology (DSIT) guidelines, which define R&D for tax purposes. At Part 1, the guidance sets out that it aims to help companies:

  • Understand HMRC’s expectations.
  • Identify competent professionals.
  • Determine if work qualifies as R&D, including identifying advances, uncertainties and project boundaries.
  • Understand what evidence HMRC expects in support of an R&D claim.

Guidance can be incredibly helpful when making an R&D claim, but it is not a substitute for the tax legislation on which it is based. An understanding of the legislative rules for R&D tax relief is an essential starting point for a robust R&D claim.

What the GfC includes and what you need to know

Now we’ve explored why the new guidance matters and what it is trying to achieve, it’s time to pull out some of the detail and why for companies making R&D claims it is vital to understand

Practical examples

The guidance includes a number of practical examples, covering a broad range of development projects in various sectors. Often it can be tempting for guidance to stick with obvious examples, rather than exploring edge cases, so this inclusivity is welcome. It aids in illustrating specific complex aspects, such as defining project boundaries and differentiating routine work from resolving scientific or technological uncertainty.

Some practical examples are already included within the DST guidelines, clarifying the meaning of key terminology in the definition of R&D. More examples are welcome, and in particular those drawn from more recent R&D projects (one example in the guidelines is the development of a DVD player).

Examples can also be found in HMRC’s Corporate Intangibles Research & Development (CIRD) manual. This manual is designed for HMRC case workers and professional tax advisers, so is a lengthy and detailed document. The GfC contain several links into specific sections of the CIRD manual, to help direct businesses to the most relevant guidance there.

Checklists and inconsistencies

Part 2 of the guidance sets out HMRC’s expectations of those claiming R&D tax relief. It includes a lengthy checklist. While checklists can be a really succinct way of setting out steps to follow, this one is a little more nuanced.

Clearer wording at each step would improve the list. HMRC updates guidance regularly, so it is likely that the GfC team will be monitoring feedback and actioning updates as the guidance beds in. There is also some potential for confusion between this section and the later guidance on record keeping, in terms of what expectations HMRC has for companies to be keeping contemporaneous written records of these steps.

Companies and advisers now familiar with the Additional Information Form (AIF) may feel that the checklist could be better aligned to the information requested in the AIF, to avoid the need to keep information in several different formats. These inconsistencies themselves point to the complexity of setting out precisely what information HMRC needs in support of an R&D claim. Companies must carefully align these lists to ensure accurate and comprehensive information in their R&D claims.

The importance of competent professionals

Part 3 of the guidance emphasises the importance of competent professionals. The judgement of a relevant competent professional in the field of science or technology to which the R&D project relates is critical to an R&D claim.

The guidance offers practical examples of what HMRC considers to be a competent professional in different industry scenarios. This supplements the existing definition of a competent professional in the CIRD manual, which is replicated in this section, and helps to clarify what level of professional qualification and experience HMRC is looking for in a competent professional.

Identifying R&D projects and activities

By far the longest section of the guidance (Part 4) deals with identifying R&D. This section confirms at the beginning that businesses should read the DSIT guidelines alongside this additional guidance.

The section covers:

  • Identifying a project and distinguishing a commercial project from a qualifying R&D project.
  • Fields of science or technology – an R&D project must seek to advance field of science or technology.
  • The different ways in which a project might seek a qualifying advance.
  • System uncertainty.
  • Qualifying direct and indirect R&D activities.
  • Project boundaries, including the start and end of R&D.

There are short, practical examples throughout to help illustrate the points made, and a case study at the end to demonstrate how to bring the different concepts together.

Approaching claims and record-keeping

Part 5 provides guidance on how to approach claims and record-keeping, offering practical advice that can serve as a useful reference for companies compiling their own claims or assessing advice received from agents.

The guidance encourages businesses to identify R&D projects during planning rather than retrospectively. This is because it is likely to enable them to gather detailed information to identify qualifying activities and costs.

There is another checklist here, which is slightly different to the one in Part 2 as noted. One requirement in the Part 5 checklist is a written plan for the project. While the guidance goes on to acknowledge that R&D may be identified retrospectively, it makes clear that HMRC will still have expectations regarding evidence and records of the project. In setting this expectation, the GfC is much more prescriptive than the existing CIRD guidance, which states that “There is no record keeping requirement specifically for the purposes of claiming R&D relief” and “HMRC officers should be flexible in considering what records will be of assistance”. This is likely a response to concerns regarding errors in R&D claims.

So, what’s next?

Now the guidance has been published, it’s important to assess its initial impact and what steps to take next.

Implications for stakeholders

Many stakeholders, including HMRC, companies, investors, agents, accountants and other advisers, stand to benefit from better guidance.

For HMRC, clear guidance helps businesses to get it right first time, avoiding potentially lengthy (and costly) compliance checks. Guidance also helps to foster consistency between case workers within HMRC, as policy and expectations are set out for all parties to follow.

It also protects businesses against rogue advice, by arming them with information to evaluate professional advice against. And for professional advisers, it provides a clear and consistent foundation for advice to clients.

HMRC’s challenge

While the R&D GfC are a welcome addition to HMRC’s guidance on R&D, HMRC’s main challenge will be to ensure consistent application of the new guidance within the various teams dealing with R&D and across the business community. Training and awareness initiatives are crucial to achieving this, as the success of the guidance depends on widespread understanding and adherence. Tax advisers can help by drawing attention to guidance, and providing feedback to HMRC to help continually improve its effectiveness.

A step in the right direction?

The new guidance is a positive step forward, but it should be viewed as the beginning of a journey toward clearer and more accessible guidance for businesses engaging in R&D activities.

Businesses should proactively familiarise themselves with the guidance, and stay informed about potential updates, as both the government and HMRC continue to refine and implement measures for effective R&D tax relief compliance.

Other updated requirements for R&D Claims

As part of the recent R&D tax changes, there have been two significant new requirements for claimants.

Notification of claims

Commencing for accounting periods starting on or after 1 April 2023, certain companies are obligated to inform HMRC in advance of their intention to make an R&D tax relief claim. The ‘claim notification’ applies to a company’s first claim for R&D relief, or where it hasn’t claimed for a period of 3 years, and should be submitted through an online form no later than six months after the conclusion of the accounting period.

Additional Information Forms (AIF)

Effective 8 August 2023, all companies seeking R&D tax relief are required to complete and submit an Additional Information Form (AIF) alongside their claim. This requirement applies to both SME R&D relief and Research and Development Expenditure Credit (RDEC) claims.

HMRC has issued guidance specifying who can submit the AIF and the additional information it should include. It’s important to note that HMRC has been actively rejecting invalid claims lacking the required AIF.

Read our KnowledgeBank article on Additional Information Forms.

Have a question for our team?

Want to know more about what the new guidance means for your approach to R&D tax relief?

Whether you’re preparing your claim now or planning for future submissions it’s important to understand the new requirements, particularly in a climate of increased compliance activity by HMRC.

Get in touch with our team of chartered tax advisers, chartered accountants, lawyers, sector specialists, former HMRC inspectors and quality assurance experts to access expert guidance for your claims.