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    Tag: research and development

    R&D tax claims drop by 26%: what does this mean for UK innovation?

    Posted on by Rebecca Campbell

    HMRC’s latest statistics reveal a 26% decline in R&D tax credit claims for the 2023–24 tax year, marking the lowest number of claims in nearly a decade. While the total value of claims remains relatively stable at £7.6 billion, the sharp drop in claim numbers – particularly among SMEs – raises important questions about the future of innovation in the UK.

    The decline in claims

    The number of R&D claims fell to 46,950, down from 65,690 in the previous year. This decline is primarily due to changes in R&D tax relief schemes, including reduced rates and increased administrative requirements, which have disproportionately impacted smaller businesses.

    SME claims dropped by 31%, while first-time claimants saw an even sharper 45% decrease. In contrast, claims under the R&D Expenditure Credit (RDEC) scheme experienced a smaller decline of around 5%. These figures suggest that while larger businesses continue to claim successfully, smaller innovators often struggle to navigate the increasingly complex process.

    Increased average claim size

    Despite the overall decrease in claims, the average value of claims has increased. Businesses that do claim are submitting larger claims – often those with more resources and experience in handling complex R&D tax processes.

    At PM+M, we see firsthand how SMEs can struggle without expert support. Our role is to simplify the process, ensure compliance, and maximise the relief available – helping businesses continue innovating despite the challenges.

    SMEs: the most affected

    Reduced relief rates and heightened administrative burdens have made the R&D tax credit less accessible for smaller businesses. With the right guidance, SMEs can still access significant relief and continue driving growth.

    Sectoral trends

    Claims remain concentrated in specific sectors, with Information & Communication, Manufacturing, and Professional, Scientific & Technical sectors accounting for 71% of the total value of R&D tax relief. While these industries are crucial to UK innovation, there is room to encourage a wider range of sectors to engage in R&D.

    Looking ahead

    The decline in R&D tax claims presents both a challenge and an opportunity. While government reforms aim to reduce fraud and error, they could potentially risk discouraging genuine innovation if smaller businesses are left behind.

    At PM+M, we help companies navigate these changes, ensuring that all eligible businesses – regardless of size or sector – can take full advantage of R&D tax credits. If your business is unsure whether it qualifies for R&D tax relief or needs assistance claiming, we can help. Our team of experts will guide you through the process, ensuring you maximise your claim and focus on what matters most – innovating and growing your business.

    If you’d like to discuss how your business could make the most of R&D tax relief, get in touch with our team at enquiries@pmm.co.uk.

     

    R&D claimants: are you prepared for a HMRC enquiry?

    Posted on by Rebecca Campbell

    Over the years, we have seen many R&D providers boast about their 100% success rates and HMRC approved processes however, in truth, R&D is no different to other areas of taxation. There is always the possibility of a HMRC enquiry.

    With error and fraud in R&D costing the taxpayer an estimated £1.13 billion, HMRC introduced the mandatory additional information form in August 2023 to create uniformity in the submission process. Since this introduction, it is estimated that 1 in 5 claims are reviewed in more detail by HMRC.

    Common trends

    There isn’t a set list of red flags that prompt an enquiry however, there are some common trends.

    • Claims originating from sectors with traditionally lower R&D intensity: This situation can raise suspicion and prompt HMRC to investigate further.
    • SMEs in receipt of funding: HMRC frequently encounters errors in this specific area which has led to additional scrutiny.
    • Substantially high claim value: If your claim value is significantly higher than the average tax savings or exceeds previous R&D claims by a large margin this could prompt an enquiry.
    • Deadline submissions: Claims submitted on the deadline are more likely to be subject to scrutiny as they may contain errors due to time limitations and a lack of supporting documentation.

    How to prepare

    While certain enquiries may be targeted based on risk or sectors, others can be completely random. As a result, it is impossible to entirely avoid an enquiry. However, you can take steps to minimise the associated risks by ensuring your claim provides HMRC with all the details needed to carry out a proper assessment.

    Should HMRC enquire into an R&D claim, it is important to:

    1. Provide detailed documentation: one of the most critical aspects of preparing for an HMRC enquiry is maintaining comprehensive and accurate documentation. Keep detailed records of all R&D activities, including project plans, technical specifications, research notes, and financial documentation. This documentation will help support your claims and demonstrate the eligibility of your R&D projects.
    2. Understand the R&D guidelines: familiarise yourself with the guidelines provided by HMRC for R&D claims as a whole. Ensure that you have a thorough understanding of the eligibility criteria, qualifying expenditure, and documentation requirements. Staying up-to-date with these guidelines will enable you to make informed decisions and avoid potential pitfalls.
    3. Maintain strong communication channels: maintaining open and transparent communication channels with HMRC is crucial. If you have any uncertainties or questions regarding R&D claims, seek clarification from HMRC directly. Proactively engaging with HMRC demonstrates your commitment to compliance. It may seem like an obvious step, but you would be surprised how many companies miss the response deadlines. Maintaining compliance is crucial for fostering a strong relationship with HMRC. If you require additional time to respond, it is important to request an extension from HMRC and keep them informed throughout the process.

    Get in touch

    If you are concerned about how prepared you would be in the event of a HMRC enquiry into your R&D claims, get in touch with our R&D experts who will help you identify any potential areas of risk and provide tailored advice specific to your individual circumstances.

    Contact corporate tax director, Claire Astley, by clicking the button below.

    Does my business qualify for R&D tax relief?

    Posted on by Rebecca Campbell

    Innovation is key to moving your business forward and the UK government want to accelerate this by offering incentives to encourage companies to push the boundaries of science and technology through Research and Development (R&D) activities.

    However, there’s an important difference between improving your own company’s knowledge, and helping the whole industry grow. Just because research and development activities have taken place it doesn’t mean a company qualifies for R&D tax relief.

    In our latest blog, we break down the differences…

    Company advance: improving your own business

    When a company focuses on a ‘company advance’ in R&D, it’s all about making itself better. That means working on things like internal processes and skills, and making sure it can compete well in the market. The R&D is aimed at creating new products, services, or ways of doing things that directly help the company.

    However, these improvements likely do not help the industry as a whole. While some projects may accidentally help others, things like making better products or improving your own technology may not result in a successful R&D tax relief claim if there are no advances in overall science or technology.

    Industry advance: boosting everyone

    On the other hand, ‘industry advance’ in R&D is about making the whole industry better. These R&D activities are undertaken to advance an entire industry or sector by addressing scientific or technological uncertainties.

    You do not have to release this information to your competitors to be eligible for R&D tax relief, but you MUST be advancing the overall knowledge and capabilities of the industry or sector.

    Industry advance projects often involve collaboration among multiple companies or organisations, aiming to improve industry-wide standards, address technical uncertainties, and drive innovation on a broader scale.

    Why it matters

    Understanding the difference between company advance and industry advance is crucial when it comes to claiming R&D tax relief. It affects the activities you can claim for and how much tax relief you receive. Before making a claim, companies must consider:

    • The advance in science or technology the project seeks to achieve
    • The information which is in the public domain and how you compare to the baseline
    • Whether the uncertainties are technical in nature and if they can be overcome through routine methods.

    Only projects seeking an industry advance fall within the definition of qualifying R&D activities for tax purposes. We would recommend carefully evaluating your business activities to ensure they meet the criteria.

    By knowing the distinction, businesses can make sure they’re using the incentives in the right way and are only claiming for eligible projects.

    Get in touch

    If you are unsure if you qualify for R&D tax relief, or you have previously made a claim and would like our R&D experts to identify any potential areas of risk and provide tailored advice to refine your claim and record-keeping process, get in touch with corporate tax director, Claire Astley, by clicking the button below.

    HMRC’s changing attitude to R&D claims

    Posted on by Laura Bannan

    HMRC’s changing attitude to R&D tax credit enquiries

    HMRC have begun to implement their new approach to investigating Research and Development (R&D) tax credit claims to eliminate ‘erroneous submission filed by unscrupulous advisers’. According to research, investigations into R&D claims have risen 900% from levels seen in 2019, with an estimated 1 in 25 R&D submissions currently being targeted.

    Following HMRC’s annual report from December 2022, it was estimated that £469 million was lost through fraud and error in its two R&D schemes in the 2021/22 tax year – the equivalent of 4.9% of corporate tax R&D relief.

    The government responded to the data by increasing resources for HMRC to improve compliance, with the specialist R&D team focused on compliance against SMEs doubling in size in recent months.

    What does a HMRC R&D review involve? 

    HMRC are taking a hard stance on the review of R&D claims and are looking for strong evidence of advancements in technology in the claimant’s industry and detailed information on the competent professionals involved in the Research & Development project.

    A HMRC review will initially look at the businesses specific projects and whether they believe these qualify for R&D tax credits.  If HMRC are satisfied that the projects qualify, they then move on to check the costings.

    Should HMRC issue a pre-decision letter stating that they do not believe the claim qualifies, then it can be very difficult to shift them from this stance, and it is unlikely that the claim would go on to be agreed.  If you decide to withdraw the claim at this point, penalties may be issued.

    What do I need to do to ensure an R&D claim is successful?

    Ultimately, you need to be very confident that an R&D project meets the BEIS definitions of R&D as set out in the HMRC guidance before the claim is submitted. Given the hard stance HMRC are taking on the review of R&D claims, we would recommend speaking to a specialist R&D tax credit adviser to guide you through the process and ensure you clearly understand the criteria and the quality of information that will need to be supplied.

    Get in touch

    If you would like to discuss your R&D tax credit claim in more detail, or have any questions about a claim you’ve made in the past five years which may not perform well against HMRC scrutiny, get in touch with one of our expert R&D tax advisers by emailing enquiries@pmm.co.uk.

    Maximise your SME R&D tax relief claims before 1 April 2023

    Posted on by Rebecca Campbell

    The 2022 Autumn Statement saw the Chancellor, Jeremy Hunt, put forward various changes to UK tax policy, including upcoming adjustments to the R&D tax relief scheme which are due to come into force from 1 April 2023.

    In our latest blog, we explore what these changes are and why you should consider maximising your R&D tax relief claims by 31 March 2023.

    What changes can we expect from the R&D tax relief scheme?

    The current rate for SMEs is an extra deduction of 130% on qualifying R&D expenditures. From 1 April 2023, the rate will be reduced to 86%, and based on the increased Corporation Tax rate of 25% (currently 19%), the net effect R&D rate for relief falls from 24.7% to 21.5%.

    Simply put, every £100,000 spent on R&D is currently worth £24,700,and will reduce to £21,500 from 1 April 2023.

    How will this impact loss-making companies?  

    Loss-making companies who surrender losses for tax credits will be further affected as the surrender value will be reduced from 14.5% to 10%, and the net benefit will fall from a potential maximum of 33% to 18.6% (£33,000 to £18,600 based on the £100,000 R&D expenditure scenario detailed above).

    How can companies ensure they make the most of the relief?

    It would be beneficial for SMEs to consider advancing any R&D projects into Q1 of 2023 where possible to make the most of the 130% / 14.5% relief. It would also be worth thinking about maximising any large outlays on expenditure, for example wages or buying materials, into the first quarter of 2023, ensuring that costs are actually incurred in this period and records are kept.

    Get in touch

    It is no secret that HMRC are tightening up the R&D scheme as a whole, therefore, it is more important than ever to ensure companies maximise their claims as far as possible, whilst ensuring they have robust evidence of the projects carried out and the qualifying costs incurred. To discuss your specific R&D projects and tax relief claims in more detail, contact Claire Astley using the button below.

    HMRC publish draft R&D guidance

    Posted on by Helen Buchan

    Earlier today, HMRC published draft guidance in relation to the changes coming into the Research & Development (R&D) scheme from 1 April 2023.

    The guidance covers various topics which have previously been flagged, such as the exclusion of overseas R&D work and an extension of the relief to include data and cloud computing costs.

    However, one key change detailed in the guidance is the requirement to submit a Claim Notification form within 6 months of the end of the relevant accounting period for any new claimants i.e. any companies who haven’t made an R&D claim for at least 3 years. If the form isn’t submitted within that deadline, you won’t be able to make the claim.

    The guidance also details a new Additional Information form containing substantial information about the claim (for accounting periods beginning on or after 1 April 2023), including details of a person at the company taking responsibility for the claim and the agents who helped to prepare the claim.

    The legislation will not be finalised until the Finance Bill 2023 and the final form of that legislation may differ from the draft published in July 2022, this means that the guidance issued could also change and no action should yet be taken based on it.

    You can view the full guidance here.

    Get in touch

    If you wish to discuss any areas of the guidance in more detail, please get in touch with your usual PM+M adviser or email enquiries@pmm.co.uk

    R&D changes announced in the Autumn Statement

    Posted on by Rebecca Campbell

    SME Scheme

    From 1 April 2023, R&D SME tax relief will be cut from an additional deduction of 130% of qualifying costs to 86%. In addition, the repayable tax credit which is available for loss making companies will be cut from 14.5% to 10%.

    The actual tax benefit lost will vary according to the profits or losses made in the company and its corresponding tax rate.  Worst hit will be loss making companies that surrender their R&D loss for a repayable tax credit.  For expenditure incurred after 1 April 2023, a loss-making company spending £100,000 on qualifying R&D will only be able to claim a repayable tax credit of £18,600, whereas in the current year they could claim up to £33,350.  Companies that have accounting periods straddling 31 March 2023 will need to apportion their R&D expenditure between that incurred pre and post 1 April.  They will effectively have 2 R&D claims in the one accounting period.

    RDEC scheme

    From 1 April 2023, the research and development expenditure credit, primarily aimed at large companies but also at companies who receive funding for their R&D work, will be increased from 13% to 20%. In most cases this increases the net tax saving from 10.5% to 15% of the qualifying expenditure.

    The primary reasons for the reduction in the SME scheme and the increase in the RDEC scheme are the perceived abuse of the SME scheme and also a recent report which concluded that higher levels of private sector R&D investment are generated for every £1 of tax relief given under the RDEC scheme that the SME scheme.  Therefore, there is an expectation that these schemes will gradually be merged into one.

    Compliance changes

    Additional changes that were announced last year in respect of the compliance around both R&D schemes are also still going ahead. These changes affect accounting periods beginning after 1 April 2023 and are again designed to reduce fraudulent claims. The main compliance changes are:

    1. A report describing the R&D projects carried out and breaking down the qualifying costs must be submitted as part of a claim
    2. Claims will need to be endorsed by a named senior officer of the claimant company
    3. Any agent who has helped in preparing a claim will also need to be disclosed – i.e., PM+M.
    4. Companies planning to make a claim, who haven’t previously claimed, will have to notify HMRC of their R&D activity within 6 months of the year-end in question.  It is expected that this will be done through an on-line portal, but no further details have yet been released.

    Further changes

    The government have also legislated to ensure that most R&D is actually performed in the UK, and from April 2023 subcontracted R&D work or work done by externally provided workers will only qualify for relief if this work is carried out in the UK. There are some exceptions to this, but these are very limited.

    Finally, on a more positive note qualifying expenditure under both schemes has been extended for accounting periods beginning after 1 April 2023 to include pure maths, cloud computing and license payments for datasets.

    Summary

    Overall, we can see a tightening up of the R&D scheme as a whole and a movement towards an RDEC style scheme for all companies regardless of size.  It is important for companies to ensure that they maximise their claims as far as possible but to ensure they have robust evidence of the projects carried out and the qualifying costs incurred.  SME’s engaged in sizeable R&D projects may want to consider the timing of their spending to see how much can be incurred prior to 1 April 2023 under the current scheme.

     

    Upcoming changes to the R&D tax relief scheme

    Posted on by Rebecca Campbell

    From 1 April 2023, R&D tax relief is changing, following announcements in the 2021 Autumn Budget. But what do these changes mean for your business?

    The Research and Development Communication Forum (RDCF) recently met in July 2022 to discuss the upcoming changes, the most significant being:

    • Restrictions for businesses conducting R&D activities overseas
    • Inclusion of cloud computing and data costs in qualifying R&D expenditure
    • Increased focus on compliance and tackling abuse of the tax credit scheme
    • Requirement of a senior company officer to sign off R&D claims

    Perhaps the most notable discussion point at the RDCF meeting was the requirement for companies to inform HMRC of their intention to make an R&D claim ‘within six months of the end of the period to which the claim relates’. If you are unsure whether you will make a claim, it’s worth submitting an advanced notification to HMRC, just in case, as there won’t be a penalty if the claim doesn’t go ahead.

    The requirement to provide prior notice of an R&D claim will only apply to new claimants, or organisations who have not made an R&D claim in the previous three years.

    According to HMRC guidance, there doesn’t seem to be any flexibility on the six-month notification period, therefore advanced planning and proactiveness will be required in identifying R&D projects as they arise and not as part of an organisation’s Corporate Tax Return preparation, which could be up to 12 months post accounting year-end.

    Take action

    We would recommend speaking to your accountant if your organisation undertakes research and development and has not yet made an R&D tax relief claim. Your adviser will work with you to agree a process of ongoing in-year project review, as the six-month advanced notification could mean many eligible organisations are unable to make an R&D claim due to engaging accountants who are not experts in this specialist area of tax, and therefore opportunities to identify activities taking place in the year may be missed.

    If you would like to discuss the changes to the R&D tax relief scheme which are due to take effect from 1 April 2023, get in touch with PM+M corporate tax director, Claire Astley, by clicking the button below.

    HMRC tackle abuse of R&D tax credit scheme

    Posted on by Rebecca Campbell

    The government have confirmed that they are to target abuse of the research and development (R&D) tax credit system, with new measures due to come into force from April 2023.

    HMRC has identified losses of over £300 million due to fraud and error in R&D claims, whereby companies were set up to claim tax credits, even though they had no R&D activity taking place.

    We explore the changes which are proposed to be made to the R&D tax credit system below.

    Overseas R&D

    From April 2023, there will be no relief for R&D activity sub-contracted to third parties who are located outside the UK.  Externally provided workers will only be eligible for relief if they are paid through a UK payroll.

    Digital claims

    All R&D claims must be made digitally from April 2023. There are some exemptions however, for example, if you are exempt from submitting your tax return online, you will also be exempt from submitting an R&D claim digitally.

    Compulsory technical narrative

    Your R&D tax credit claim must include a compulsory technical narrative, which is basically a report which includes further details of the claim.

    The report should demonstrate:

    • The technological innovation(s) that your company has sought
    • The current limitations
    • The challenges you faced
    • The resources used
    • The outcomes achieved

    Compiling a robust and detailed technical narrative and having an excellent record keeping process can help reduce the risk of investigation and maximise your R&D tax relief claim.

    Endorsement from a senior officer

    Before submitting the claim, you will need to obtain sign off by a named senior officer at the company, along with details of any agents who have advised the company during the claim process.

    Inform HMRC in advance of making a claim

    Companies must inform HMRC of their intention to make an R&D tax credit claim prior to doing so.

    Get in touch

    It is more important than ever to ensure your R&D tax credit claim is robust and compliant before submission. To understand how the changes may affect you, or for a wider R&D tax discussion, get in touch by emailing enquiries@pmm.co.uk.

    R&D tax credits statistics 2021 – everything you need to know

    Posted on by Rebecca Campbell

    HMRC’s latest statistics detail the number of companies claiming R&D tax credits up to the year ending March 2020, the amounts paid out in R&D support as well as the number of claims by industry sector, plus much more. The statistics show that the total number of R&D tax credit claims increased by 16%, with first-time SME claimants increasing by 25%.

    The government had made it clear that they continue to be eager to support companies who are prioritising and investing in innovation in order to boost the economy.

    In our latest blog, we highlight what these statistics mean for UK businesses.

    Increasing number of R&D tax credit claims made

    The year ending March 2020 saw a 16% increase in the total number of R&D tax credit claims made – over 85,900. The increase is said to be primarily driven by a 16% rise in the number of small and medium sized businesses (SMEs) making R&D claims to a total of 76,225 – highlighting that SMEs continue to make R&D projects a priority, driving forward innovation.

    How much R&D tax relief was paid out by the government?

    Over £7.4 billion in tax relief was paid out by the government in the year ending March 2020 – up 19% from the previous year. Again, SMEs received the most support, with £4.4 billion worth of funding compared to larger companies, who claimed payments of £3.1 billion.

    Which industry claimed the most R&D tax credits?

    Accounting for 64% of all claims made, the industries which claimed the most R&D tax credits were:

    • Information and Communication (22%)
    • Manufacturing (22%)
    • Professional, Scientific and Technical (19%)

    Although, 49% of all claims were made by companies with registered offices in London and the South East, the North West was not far behind – positive news for the region.

    To summarise…

    The latest statistics from HMRC are very encouraging – proving that R&D is still very much a priority for many SMEs and large companies. Additionally, the number of R&D claimants is expected to grow year on year, as the need for further innovation to boost the economy grows.

    If you are unsure if you are eligible for R&D tax credits, or would like our assistance to submit a claim, get in touch with one of our expert advisers by emailing enquiries@pmm.co.uk