2023 has been busy with a host of changes already made to R&D tax relief.
The Chancellor’s Spring Budget saw the government announce its tax and spending plans, including more change for R&D tax policy. 1 April 2023 then saw implementation of the previously announced rebalancing of the SME and RDEC scheme rate, plus a new rate for R&D intensive SMEs, the introduction of new qualifying costs for data licences, cloud computing and pure mathematics, as well as a suite of measures to support HMRC in tackling abuse of the incentive by changing the administration around R&D claims.
Whilst it is vital for companies of all sizes submitting R&D claims to understand how these significant adjustments will impact them, in this article we take a closer look at specific considerations for larger businesses, groups and multinational enterprises.
What are the 8 August changes to R&D tax relief?
CEOs, CFOs, Heads of Tax and business owners have been busy familiarising themselves with how and when these changes will affect their businesses, but from 8 August 2023 an important change comes into force which will affect all companies seeking to claim R&D tax relief.
Additional information form
From 8 August 2023, all Corporation Tax (CT) returns containing an R&D claim, including amended returns, will need to be accompanied by an additional information form, filed via an online HMRC portal.
Read about the importance of real-time record keeping.
What mandatory additional information will be required?
It is worth noting that, until now, providing supporting information alongside an R&D claim has never been obligatory from a legal standpoint. While many companies have voluntarily submitted descriptions of their R&D projects and detailed analyses of their R&D expenditures to HMRC, a considerable portion have opted not to do so.
This lack of mandatory supporting information has posed challenges in effectively targeting HMRC’s R&D compliance activities. However, as of 8 August 2023, a significant shift will take place. Companies will be legally obligated to submit supporting information alongside their claims; otherwise, their claims will be invalid.
From 8 August 2023, all claims will need to be accompanied by an additional information form.
The form needs to be submitted via an online portal before the corresponding tax return. Information required for the form includes:
- Your company’s Unique Taxpayer Reference (UTR), PAYE reference and VAT number.
- You SIC code (this can viewed on Companies House).
- Contact details of a senior contact in the company (e.g. director, group tax manager, technical lead) responsible for the claim.
- Contact details of your R&D agent (if applicable).
- Accounting period start and end dates.
- Which relief is being claimed (SME, RDEC or both).
- Breakdown of qualifying expenditure by cost category, with any amounts attributable to Qualifying Indirect Activities (QIAs) separately disclosed.
- Total qualifying expenditure being claimed for each project.
The form also asks for details of your R&D projects. How many you describe depends on how many projects you are including in your R&D claim, as follows:
- If the claim includes 1-3 projects, details should be provided for all projects.
- If the claim includes 4-10 projects, details should be provided for projects giving at least 50% coverage of qualifying expenditure, with a minimum of 3.
- If the claim includes 11+ projects, details should be provided for projects giving at least 50% coverage of qualifying expenditure, with a minimum of 3 and maximum of 10.
- Companies with a significant number of R&D projects should describe the largest 10 based on qualifying expenditure.
As noted, the additional information form should be submitted prior to filing the CT return which includes the R&D claim. For companies with separate CT and R&D agents, coordination and transparency will be important to comply with timings and ensure that figures align. Responsibilities should be agreed ahead of filing to avoid any confusion or unforeseen costs.
How will this change impact large and complex businesses claiming R&D tax relief?
Companies will still be able to submit a separate report if they feel it is necessary to provide any information not required in the form. This can be done by attaching a separate report to the CT600 submission. For more complex R&D claims, companies may wish to provide an explanation of the claim methodology, including any sampling undertaken in assessing R&D projects, or include the relevant credentials of their competent professionals, which is often tested in an HMRC compliance check.
Businesses may have established bespoke methodologies in place that have been developed over time, and potentially discussed and agreed with HMRC. Where this is the case, it should not be necessary to adapt these methodologies just to suit the form, however you may need to review the requirements alongside your established approach to avoid the risk of adding an unnecessary administrative burden.
If your business has a dedicated Customer Compliance Manager (CCMs), you may wish to arrange a discussion with them to agree your approach both to the information provided in the form and any supplementary details. Your CCM does not have discretion to allow you bypass the form, but upfront engagement should give you an opportunity to minimise disruption resulting from the new requirements.
As listed above, the form absorbs a relatively limited range of information, however some of these requirements are likely to place an additional burden on larger businesses. For example, your established approach to calculating qualifying R&D expenditure may not distinguish between directly and indirectly qualifying R&D activities. The form asks for QIAs to be separately quantified. Similarly, businesses who carry out hundreds of R&D projects each year often apply a sampling approach to identify R&D, which may pose challenges when determining which projects need to be described within the form.
Being prepared will help to avoid an additional time or cost drain arising from the transition to the new process. In a worst case scenario, a lack of preparation could lead to your R&D claim being rejected by HMRC (they have been given wide ranging new powers to do this), resulting in additional delays.
ForrestBrown’s large company R&D tax relief servicesFind out more
How to effectively prepare for these changes
Many businesses have already proactively engaged with their CCM to gain a better understanding of how to approach the new requirements. As noted above, you may find that your CCM has less autonomy and flexibility in this matter than expected, however an upfront discussion is still useful to ensure you are both on the same page.
There are reports of HMRC’s broader resourcing issues impacting these efforts through a high turnover of staff in customer-facing roles. Businesses are seeing a high turnover of CCMs, which sometimes impacts their availability for such positive upfront engagement. As a result, remember to document any discussions for future reference if needed.
The two biggest risks to more sizable enterprises using the new online form from 8 August 2023, is that their claim methodology may no longer be fit for purpose, and/or that transitioning to the new process will result in an additional time and cost burden. Both of these risks can be managed by putting a detailed plan in place.
If you do need to submit a separate report alongside the additional information form, now is the time to consider the information needed, to avoid duplication with the form. Now is also the time to plan the process for submission: who will compile the relevant information for the form, who will check that it is correct, who will take care of the submission and do they have appropriate Government Gateway access to do this, and how will you manage timings alongside the CT600 submission? If you rely on multiple advisers, they should work collaboratively to minimise the impact on your team.
HMRC’s approach to compliance has evolved to be more stringent. In this new reality, larger and more complex businesses should carefully consider the disclosures they make to HMRC regarding their R&D claims. Don’t assume that the additional information form will give HMRC all of the details required to avoid a compliance check.
Enquiry support service for HMRC R&D tax relief enquiriesFind out more
Other changes to be aware of
For accounting periods beginning on or after 1 April 2023, businesses filing R&D claims will also be affected by these forthcoming changes.
Senior officer endorsement and disclosure of R&D agent
R&D claims will need to be endorsed – or signed off – by a named senior officer of the claimant company. Although CT returns already have to be endorsed by a senior officer, this change is designed is to encourage businesses to check their R&D claims in carefully before submission.
HMRC has found during some enquiries into R&D claims from smaller companies a limited understanding of the details of their R&D activities and costs. This change is targeted squarely at such cases.
The requirement to disclose the use of an R&D agent will similarly enable HMRC to focus its compliance activities more effectively.
For larger organisations with complex structures, the senior officer may not be directly involved in the R&D claim preparation. In particular, since R&D claims involve input from both technical and financial staff, ensuring that the senior officer has the right information to carry out this sign off is essential. A documented claim methodology which includes how risks have been identified and managed will be important.
Requirement to notify HMRC in advance of making an R&D claim
This new requirement only affects companies that haven’t previously claimed R&D tax relief, or if there has been a gap of at least 3 years between claims.
Larger organisations tend to carry out multi-year R&D projects or have dedicated R&D departments carrying out R&D projects each year. As a result, it is likely that an R&D claim is made annually. However, note that this requirement applies on a company or entity level. A newly acquired subsidiary may have carried out R&D but not accessed relief. If so, it will be required to notify its intention to claim within 6 months of the end of the relevant accounting period.
Similarly, sometimes restructuring within a group leads to R&D expenditure moving from one entity to another. This could introduce a new notification requirement.
A proactive approach to reviewing your R&D expenditure and R&D strategy will ensure that these risks are identified well ahead of time and prevent any lost relief.
HMRC power to remove claims
In addition to the aforementioned developments, the recently proposed legislation grants HMRC extended powers to address erroneous R&D claims. Under the new provisions, if HMRC has reasonable grounds to believe that a claiming company has failed to adhere to the requirements associated with filing their claim, it will have the power to remove the claim without enquiry.
This expansion of HMRC’s authority aims to ensure greater accuracy and compliance within the R&D claim process. By granting HMRC the ability to remove claims that do not meet the prescribed standards, the legislation seeks to enhance the integrity of the system and safeguard against inaccurate or improper claims.
In such instances, companies will have 90 days to send written representations to HMRC for consideration, although this falls short of a legislative right of appeal.
Many of the changes being made to R&D tax relief introduce an additional compliance burden on companies, with the implications for non-compliance being applied strictly. It will be easier than ever to inadvertently fall foul of the new rules, leading to an inevitable delay in receiving relief.
This challenge can also be an opportunity for innovative companies
The main challenge of the introduction of this new mandatory additional information will be the additional administrative burden that it brings.
The spectre of HMRC’s new power to delete claims where businesses have completed the form incorrectly has the potential to raise the blood pressure of FDs and CFOs. It also increases the risk of mistakes being made and subsequent relief being delayed; an unintended consequence of which is innovation being stifled.
However much a necessary evil these changes will seem to businesses with an established approach to R&D claims, it is worth taking this opportunity to review your internal approach and claim methodology. Whilst time consuming, reviewing your methodology, including any sampling techniques used may result in process efficiencies being made and cross department communications being improved. The changes are mandatory, so it makes sense to also see this as a chance to think more strategically about how your R&D activity is accounted for and communicated with a broad range of internal stakeholders including at the C-Suite level.
Within this context, businesses claiming RDEC should begin modelling the impact of the recent ‘rebalancing’ of rates to R&D tax relief on their activity, as well as the planned changes to qualifying overseas R&D expenditure (potentially still coming into force after April 2024), in addition to the expansion of qualifying expenditure to include data and cloud costs and the inclusion of further maths.
How ForrestBrown can help you prepare for the changes to R&D claims from 8 August 2023
ForrestBrown offers valuable assistance and experience in streamlining the data collection process for large and complex enterprises, enabling them to have peace of mind that the requirements of the new mandatory additional information form have been captured and evidenced to HMRC.
If you currently outsource your R&D tax credit claim to an adviser, our first port of call would be to review the systems they are using to extract the data required by the new mandatory digital filing. We will ensure any details of methodology and documentation provided meet the new rules and emerging compliance standards.
For those companies delivering their R&D tax claim in-house, we can advise on how to streamline the process, helping to highlight risks relating to the new senior officer endorsement requirement in particular. It is not uncommon in larger businesses for the senior officer to be three or four steps removed from the technical and financial teams working on an R&D claim.
We deliver comprehensive training sessions and conduct quarterly meetings with our clients, empowering their teams to effectively recognise (R&D) activities while accurately documenting specific technological advancements and uncertainties.
By maintaining an ongoing relationship with ForrestBrown, our clients can capture a holistic overview of their R&D endeavours, surpassing the limitations of an annual retrospective review.
Employing a proactive and adaptable approach, our solutions are tailored to accommodate the complex organisational structures and information systems of larger organisations, ensuring seamless integration across the claim process.
Our services extend beyond the preparation of end-to-end claims, encompassing customised support for HMRC enquiries, fostering the development of in-house teams, conducting due diligence, and offering guidance on international R&D initiatives.