In the 17 years I have been involved in Research and Development Tax Relief, I have never seen so much change and uncertainty around the schemes. Q4 2022 certainly has thrown a spotlight on the Tax Reliefs like no time before.
t the start of the quarter, we were digesting the findings of the recent HMRC & ONS Statistics for the performance of the schemes and also the ONS comparison of Business Enterprise Research and Development Statistics to the R&D Tax Relief Statistics, that were also published on 29th September. In the past there has always been a significant discrepancy between the two, with the Tax Relief statistics always throwing out a far larger number. However, it was “all change” in the BERD statistics as the ONS looked at their modelling and felt it didn’t really represent the efforts of smaller UK businesses in conducting R&D. They waved their magic wand and all of a sudden, the UK had spent an extra £15 billion on R&D in 2018 and up to £16.1 billion more in 2020. The ONS will use this model when they release their full BERD statistics for 2022 later this month.
Then in November, in the shadow of the disastrous 44 days of Liz Truss’s role as Prime Minister, and the prospect of new Chancellor, Jeremy Hunt’s Autumn Statement leading to spending cuts and tax rises, The Times newspaper have written a series of articles shining a light on some of the darker arts of the R&D industry. This has been followed by The House of Lords investigating R&D Tax Relief as part of their wider review of the Finance Bill 2022, where members of the scientific community, the accounting profession and the R&D Tax Relief industry have been called to give evidence.
The problem is clear for all to see, but apparently not HMRC, over the last 5 years there has been a rise in the number of firms that see cold-calling and selling their 100 percent success rates and the notion of free money from HMRC to anyone who will listen. They are applying PPI techniques to the R&D Tax Relief Industry, throw enough brown stuff and some of it will stick!
The changes announced in the 2021 Autumn Statement are already baked into the R&D Tax Relief Scheme and will take effect for accounting periods starting on/after 1 April 2023.
Some of the changes already coming in may help on the fraud and pushing the boundaries:
- notifying HMRC of any external advisor;
- signing off the R&D Claim by a senior director;
- early notification of the intention to claim, which has to be within six months after the year end for a company that hasn’t claimed in the previous three years;
- all claims will have to be made digitally;
- the costs will have to be broken down; and
- an explanation of the R&D will be required
There are other changes coming in that will also affect the value of the claim for accounting periods starting after 1 April 2023:
- Subcontractors – only UK based subcontractors will be eligible in claims, so if you are near-shoring or off-shoring your development at the moment, you can still do this, you just won’t be able to include the cost in your R&D claim. Would Re-shoring be a possibility? This is designed to boost the productivity of the UK and to build on the skills already in the country. There are some limited exceptions to this change;
- Cloud Computing and Data costs – in an effort to keep the tax relief relevant these essential development costs for tech and bio pharma will be eligible; and
- Pure Mathematics – has previously not been considered a science, but with the rise in algorithms, its now to be included.
Jeremy Hunt’s 2022 Autumn Statement has thrown in some significant additional changes, which clearly are hoped will go some way to reduce the effect of fraud and manipulation, but will have a significant effect on genuine claimants:
- Whilst I fully expected the enhancement rate to be reduced to 100% which would have meant that a profitable company would obtain tax relief equivalent to 25% of eligible costs, and would have maintain the status quo with the current rate of relief equivalent to 24.7%, he went a step further and reduced it to 86%, which reduces the relief to 21.5% of eligible costs;
- He has also greatly reduced the repayable tax credit from 14.5% to 10% this means with the reduction in the enhancement rate to 86%, a loss-making company which might previously have received a 33.35% tax relief, it has been reduced to 18.6%; and
- It was also considered that he might merge the 2 schemes (SME and RDEC) into one – whilst he didn’t do this, he did greatly enhance the rate of RDEC to 20% from 13%, which equates to a tax saving of 15% of the eligible spend.
I’ll finish by giving you a bit more information about this year’s statistics!
Looking at the statistics in their entirety, the headline is that despite the estimated number of claims increasing to 89,300 from a final figure of 83,410 in the year to March 2020, the overall amount being claimed has in fact gone down in the year to March 2021 to an estimate of £6.6bn compared to £6.9bn for the previous year. The amount of money spent on performing R&D has also fallen to £38.1bn down from £42.8bn in 2020.
COVID is an obvious candidate for being the primary cause, firstly because a lot of businesses stopped working or made significant changes to the way they operated in the first 3 months of the financial year. Secondly, the impact of the furlough scheme, if a worker was furloughed, they couldn’t undertake any work, if they couldn’t undertake any work, they couldn’t be performing R&D.
Diving into the numbers in more detail, the estimate for the number of SME claims is 78,825 with a near 50:50 split of reductions to corporation tax and repayable tax credits. The estimated number of RDEC Claims is 10,475 of which just under 4,000 were from large companies and the remainder from SMEs who were claiming for subcontracted or subsidised R&D, which they couldn’t claim for under the SME scheme. There was a 9% decrease in the number of large company claims, a 7% increase in the number of SME scheme claims and a 20% increase in the number of SMEs claims for RDEC.
Of the £6.6bn being claimed, £4.2bn was claimed through the SME scheme claim and £2.4bn claimed trough RDEC, just over £2bn was claimed by large companies and around £365m claimed by SMEs. The amount of qualifying expenditure of £38.1bn is actually lower than the expenditure in the previous two years.
The largest volume of claims continues to come from London and the South-East, which represents 31,790 claims or 35.6% of claims. London and the South-East also accounted for 49.7% of the value of all claims. The North West and the East of England had the next largest volume of claims, however these combined don’t even reach the number of claims filed from London.
The largest volume of claims came from the Manufacturing sector with 18,230 claims, they were closely followed by Information and Communication, which filed 17,310 claims and the Professional, Scientific and Technical sector with 15,880 claims, it was also this sector that also claimed the largest amount of the value of R&D claims with £1.63bn. In total these largest three sectors have claimed 67.3% of the £6.865 bn of tax relief and filed 61.4% of the claims. The next largest by volume of claims and value of claims was the Wholesale and Retail trade sector with 9,810 claims and £455m of value.
The average claim value for an SME under the SME scheme for the year to March 2021 was around £53,700, down from £56,400 in 2020, however perhaps a better estimation for a new claimant might be the median R&D claim for SMEs which stood at £20,850. The average RDEC claim by large companies was £500k down from £534,700 and the average RDEC claim by SMEs is £56,300, down from £66,500.
If you’d like to know whether you might be able to claim or need support to cope with the coming changes, why not book a no-obligation discovery call with me at calendly.com/cooden/discovery-gbj