Last week, HMRC released the long awaited findings from their R&D Consultation entitled “Improving access to Research and Development tax credits for small business” with its aim to make the scheme more visible and accessible to SME businesses.
If you were expecting the findings to follow the path of the eligibility criteria to qualify for R&D Tax Relief in that there would be a significant advance of existing knowledge in an area of science or technology be prepared to be significantly underwhelmed.
In a nutshell the only really interesting things to come out of the consultation were:
- We are going to bring back advance assurance that we got rid of 6 or 7 years ago, however it will be improved, for SMEs with a turnover of less than £2m and less than 50 employees, going through advance assurance will guarantee that the first three years of claims will go through with a rubber stamp;
- We are going to Tweet a bit more about R&D Tax Relief and the benefits to your business;
- We are going to create a specific SME focussed delivery format, separate from the CIRD manual, for R&D Tax Relief so small business owners can understand it better; and
- We will create templates to allow SMEs to better record their time and costs associated with R&D.
Nothing in the consultation’s findings is rocket science and we don’t think that there is anything that will represent a “Golden Bullet”. The principle problem in our view with the lack of claimants of R&D Tax Relief is Self-Assessment itself and the risk of enquiry and penalties for incorrect or inaccurate claims. Whilst there needs to be oversight of R&D Tax Relief claims, there also needs to be some form of communication from HMRC that SMEs are not going to be taken to task and penalised for incorrect or erroneous claims, so long as they aren’t fraudulent. If you can remove this burden of doubt and worry from an SME business, then and only then will you see a significant increase in the claims for R&D.
Obviously one of the ways that you can remove some of this concern by working with a company that specialises in R&D Tax Relief, such as Cooden Tax Consulting. Not only do we have expertise in this area, but we also maintain significant Professional Indemnity Insurance to provide you with piece of mind.
For a more detailed overview of the consultation’s findings and our take on what they might mean for your business read on.
What have HMRC been doing to inform the SME community of R&D Tax Relief, before the start of this “Brave New World” of openness and accessibility?
- they have, apparently, been publicising R&D Tax Relief at shows where SMEs are likely to congregate. CTC Says – as part of our marketing strategy we have attended a few of these sort of shows, in particular The Business Show, perhaps being the largest of its kind and we have neither seen nor heard anyone from HMRC talk or attend one of these, as accountants we need the focussed CPD so would have jumped at the chance;
- they have been using their specialist units to speak to accountants and run seminars with their clients. CTC Says – we have been to one of these and it was a useful insight into what the team do, but it wasn’t a real call to action
- they have used the “Business is Great” Campaign to promote R&D Tax Relief.
These have all been good, but haven’t really driven up significantly the number of claimants, so clearly it isn’t working.
What were the principle findings of the consultation? And what do we think about them?
1 – Awareness
- “Businesses cannot access R&D tax reliefs unless they know about them, and they cannot obtain full value from the tax reliefs if they don’t know about the range of innovative activity they support.” CTC Says – this is the first thing raised and does get straight to the point.
- How are HMRC going to do this? Well they “will make more use of one-to-many communications such as email and Twitter to keep customers updated on R&D policy and technical developments.” CTC Says – Not exactly ground breaking, but to give them credit when the report was published on the 28th October, they tweeted about it twice and David Gauke, Chief Financial Secretary to the Treasury had a photoshoot with an innovative shoe manufacturer, Vivo Barefoot , and promoted the findings of the report. Well done HMRC, but in the following week, there wasn’t another tweet about it! We know some good Social Media marketing businesses that could help HMRC get the message out a little better. Do they know about, Buffer, Hootsuite and Tweetdeck?
- They will also be working with five regional growth hubs to improve the staff’s knowledge of R&D Tax Relief and they will work with Tax advisers and agents. CTC Says – it will be interesting to see which Regional Growth Hubs they will be working with, will it be the ones where there is an HMRC office specialising in R&D or will it focus on driving the ‘Northern Powerhouse’ or…… who knows;
- They will make use of more of their own data and will follow up with companies that have applied to Innovate for grant funding and encourage them to claim R&D Tax Relief;
- Finally perhaps the greatest advance, isn’t an advance at all, but going back to what may have worked in the past, the provision of advance assurance for first time claimants. CTC Says – review more detailed information on Advance Assurance below.
2 – Design
- “Respondents told us that the definition of R&D for tax purposes was not a barrier to claiming relief”. CTC Says – we agree that this is generally the case, but there are areas where improved examples can be made and this is one of the areas they will be covering.
- ”The design and understanding of the rules around subcontracted R&D was a repeated theme of the responses to the consultation”, this is particularly the case when you are trying to identify whether your customer is an SME or not. CTC Says – we have a number of clients who undertake subcontracted R&D and it takes a significant amount of time to review contracts and discuss the form of the contract with managers to determine whether or not the work is subcontracted rather than the provision of staff.
- “The tax definition of an ‘advance in science and technology’ extends on a spectrum from ‘…extend(ing) overall knowledge and capability in science’ through to the ‘use of science and technology to duplicate the effect of an existing process … in a new or appreciably improved way.’” A number of correspondents identified a lack of guidance on what contributes ‘appreciable improved’ and so HMRC have agreed to look for a few more examples of appreciable improvement.
3 – Understanding
- HMRC will offer “improved guidance concerning the interaction of R&D Tax Relief and Grant Schemes in a State Aid context.” CTC Says – One of the things that has disappeared from their guidance over the last 2 years has been the removal of “de minimis” from the CIRD legislation and this has caused significant confusion. With grants being received from MAS, Growth Accelerator and LEPs, how can an SME business make the correct decisions over whether their de minimis grant means that all of the costs of an R&D project have to fall within the Large Company Scheme or whether just the costs covered by the grant.
- They will change the guidance for SMEs away from the CIRD manual format to be a bespoke SME focused guidance. CTC Says – Whether this means we will be presented with a series of cartoons, graphics etc to promote R&D remains to be seen, expect this to be published at some point in 2016.
- “we will extend our current work on best practice in R&D reporting, to produce templates and guidance products to help smaller businesses to record their qualifying activity and qualifying expenditure.” CTC Says – We hope that a business that doesn’t make use of these templates will not find it more difficult to pursue a claim, but more of a concern is whether this will see a move away from using a competent professional’s best estimates for staff involvement in R&D being a suitable method of calculation.
- The Advance Assurance programme will allow software developers to get a better understanding of whether their project qualifies or not. HMRC have taken the unusual step of talking to their software developers about what represents an advance in Science and Technology. CTC Says – Not sure given the track record of HMRC and their ability to deliver IT projects over the last 15 years is going to provide the best evidence of what represents an advance.
4 – Advance Assurance
- Will be available from November 2015, it will be available to SME businesses with less than £2m turnover and less than 50 employees. The business can be anywhere in the R&D life-cycle. It can be used by companies that have a tax adviser and companies that don’t. CTC Says – We wait to see whether tax advisers can seek advance assurance on behalf of their client.
- “Successful applicants will receive assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.”
- HMRC will work with businesses and finance advisers to explore how Advance Assurance links to the financing of innovative small companies, and how that link could be strengthened. CTC Says – This is perhaps one of the more welcome new practices to come out of this, as bank funding continues to be beyond the realms of most SMEs, access to other forms of financing, whether it is alternative finance or grant funding are most welcome.
5 – Other Tidbits
- “As the majority of customers now file their claims online HMRC will be introducing new digital solutions to automate parts of processing the payments and concentrating processing in one location to improve the speed, consistency and accuracy of HMRC’s treatment of new claims for relief. In turn, this will free up expert resource to provide specialist advice and support to technical queries relating to claims.” CTC Says – having only recently had to phone an HMRC office to chase up a repayment for a client’s claim that had been with HRMC for 8 weeks, we hope they haven’t already put this policy in place.
You can read the full report at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/471660/Improving_access_to_Research_and_Development_tax_credits_for_small_business_-_summary_of_responses.pdf
And there was a final infographic of future plans which can be accessed at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/471661/Improving_access_to_Research_and_Development_tax_credits_for_small_business_-_infographic.pdf