The R&D Tax Credit Scheme: A Victim of its Own Success?
RDP recently attended an HMRC Agent briefing, which gave some useful insights into the current state of play on the R&D tax credit programme and on certain areas of concern.
Briefly, taxpayers are now more aware of this government-sponsored programme as there has been an ever increasing number of claimants, with the amount paid out to companies topping £3.5bn for the first time in the 2016-17 period, an increase of 25% year on year.
Cash Can be Both Attractive and Problematic
Continuing support for the scheme was the message at the meeting as it appears the R&D tax credit programme is here to stay with the present schemes. But it may change if or when Brexit is implemented. During the meeting, HMRC expressed concerns about an emerging pattern of illegitimate claimants due to the Programme’s attractive cash option. This is manifested mainly in two ways:
- A blanketing of a large number of small claims with dubious credentials that don’t meet the Programme’s key criteria: technological advancement and uncertainty.
a. Examples that were presented during the briefing included trialing new dishes on a restaurant menu as well as attending toy fairs to work out new product ranges.
- With an R&D project capped at €7.5 million and significant amounts of money being paid out, the scheme is now seeing fraudulent attempts for claims. This includes fraudulent practices such as falsified invoices for work that was not carried out. HMRC has recently prosecuted directors and asked for further documentation as a result of these practices.
Both HMRC and R&D tax credit service providers have concerns that if this kind of pattern continues, the scope of the programme may become less advantageous for existing claimants who claim their credits the right way. It also can negatively impact future first-time claimants.
From RDP’s point of view, given our service offerings in several countries, we have witnessed this before and found that history is repeating itself. These same concerns were raised with the Canadian programme in the 1990s and then again in the United States in the mid-2000s. As a result, both countries took significant steps due to fraudulent claim submissions. This led to the requirement that claimants in both countries provide documentation for their R&D claims on a contemporaneous basis.
More Honesty, More Scrutiny
Both countries now have a tightly regulated scheme whereby the criteria for R&D tax credit eligibility are narrower with most claimants expecting enquiry on their first claim submissions. The UK programme is comparatively more generous as it is in its “teen years” versus “senior citizen” status for the other two comparable programmes. The UK could follow suit if the perception of abuse persists. As a result, RDP is presently preparing its clients and trusted advisors to modify existing claim processes as we know what to prepare for in advance.
The impact of the higher numbers of claims and the need for proper scrutiny of claims has led to a knock-on impact on genuine claimants, notably impacting the processing speeds. Since this summer, for the first time, we have seen the system experience severe delays. The usual 28-day review period for reviews of R&D tax credit claims was at times delayed by 2 to 3 months. This slowed the receipt of vital funds for companies that rely on such funding.
HMRC identified this issue and refocused its resources toward clearing the backlog, to the extent that R&D tax credits are getting back to normal speed, but those who are claiming the RDEC (non SMEs or SMEs that fund research projects by non-SMEs) are experiencing between 4 and 5 months of delay.
However, it is expected that when the peak filing period (Dec 18 to Mar 19) arrives, there could be a similar pinch on time, and with history generally repeating itself, there will be the same number of processors. So, in the short term what can be done when it comes to preparing for delays?
- If you are already claiming, bring forward your R&D work to complete before the end of November to beat delays; and
- If you are experiencing delays, limit the number of follow-ups you make with HMRC as they advised us at the meeting for this to be limited so it can help with processing claims.
Finally, the HMRC meeting gave an update on software claims, where new policies are adopted to improve HMRC’s guidance for software companies which has not kept pace with the changes in the software industry since it was drafted 10 years ago. Therefore, claimants will have a clearer picture of the level of advancement sought when it is issued in the next few months.
As we provide government funding services internationally, we have already seen the initial signs of history repeating itself. We have already started preparing clients and alliances as it is likely that claimants experience more scrutiny. With finite resources, certain types of claims will be targeted more closely by HMRC especially those with little or no support. Do you want to be caught in the crossfire when your present claims are no longer sufficient, and your present provider is not reacting to the changes in programme policy?
Luckily RDP Associates has a solution to overcome what is likely to take place. It is our Innovation Connection Programme (ICP). The ICP is a real-time R&D tax credit documentation system that provides the following:
- It documents a company’s contemporaneous evidence while the actual work is being carried out;
- It offers a simple process to determine what is eligible to claim and what is not;
- It creates additional information for your business that is useful in product development, not just for the R&D claim; and
- It is easy to use and requires minimal time for claimants.
If you seek strategic advice on your claim preparations, contact the author at
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