Onerous changes to the research and development (R&D) tax relief process, coming into force on 1 August, could deter applications from Scottish SMEs needing financial support for projects.
The new administrative regulations, which HM Revenue and Customs (HMRC) hopes will curtail fraudulent R&D claims, are likely to deter genuine claims from bona fide innovators.
As part of its campaign to identify malpractice, HMRC will require businesses submitting R&D tax relief claims to provide more granular information than previously, and to do so in digital format.
This includes an additional form breaking the costs down across all qualifying projects, providing a detailed description of the R&D and the advances in scientific or technical knowledge for at least 50% of the qualifying costs, and detailing the extent of the costs that are considered indirect.
Each claim will also need to be endorsed by a named senior officer of the business, any agent advising on the claim must also be named and a new form is required each year and for every entity within a group.
This new regime will be bureaucratic, costly to administer and a deterrent to investment.
The new regulations will be a shock to many businesses relying on R&D tax reliefs as they have been overshadowed by recent reductions in the value of R&D tax relief for SMEs and the proposed merger of the current R&D tax relief schemes.
Whilst the changes to include a named officer and supporting agent will hopefully reduce fraud, the cost-to-implement is going to be a major deterrent for many SMEs and likely to lead to a dramatic reduction in investment – quite the opposite of what businesses need.
The new Additional Information form will place further administrative pressures on businesses to report R&D claims for many claimants and advisors.
In addition, businesses with accounting periods starting on or after 1 April 2023, which are first time claimants or that have not made a claim in the previous three years, must also inform HMRC of the intention to make a claim within six months of the end of their accounting periods.
R&D tax relief fraud has become a major problem in recent years. HMRC accounts for 2021 to 2022 estimate the level of error and fraud within R&D tax reliefs to be £469m, or 4.9% of related expenditure.
Latest figures from the Office for National Statistics show that expenditure on research and development was £61.8bn in 2020; an increase of £2.1bn since 2019.
R&D tax reliefs have a key role in incentivising R&D investment by reducing the costs of innovation. The UK Government is extending the scope of qualifying expenditures to include the costs of datasets and of cloud computing.
R&D tax relief stimulates technology and scientific investment and is critical to the well-being of the UK economy and to the SME sector, which is a major driver of innovation.
These new regulations are likely to deter investment and we would encourage SMEs to ensure that they are aware of the new rules and plan to minimise the increased costs of administration.
For those businesses undertaking genuine R&D activity, there can still be significant tax cash flow benefits to submitting a claim, however, it is now more important than ever to take good advice from a reputable claims provider.
Gemma Monaghan is head of research and development tax in Scotland at Azets
