During COVID, we posted a Nordens TV video talking about R&D. The world of R&D (Research & Development) can be as promising and prosperous as it can be confusing. For a while now, the integrity of R&D tax credit and the approval process has been under serious questioning. Many firms knowingly put through fraudulent claims for R&D, knowing they’re illegitimate and go against what R&D stands for. At Nordens, we are still offering a free review for businesses to see if they are eligible for a claim. Click here for your free review by a tax and R&D specialist to see if you are eligible.
With increases in fraud, the government and HMRC have proposed to enforce policy changes to prevent further abuse. This is expected to come into force in April 2023, with the Lords Finance Bill Sub-Committee also examining the reforms. With the scrutiny on R&D at present, our CEO appeared recently on Times Radio to talk about the topic.
We break down the new policy changes coming in April 2023, whether it will be enough, and shed light on the majority of R&D claims being legitimate that will further UK innovation…
Why Has R&D Been Subject To Fraudulent Activity?
The R&D scheme since its inception back in 2000, has reportedly cost the UK taxpayer over £7.4 billion. At the Spring Budget 2021, the then Chancellor Rishi Sunak set the government a target to raise total investment in R&D to 2.4% of UK GDP by 2027. This signifies the mass amounts of money being pumped into R&D for businesses. It also highlights the intention of the government in promoting and rewarding innovation.
The Times recently published a report into R&D tax credits. They claimed that the scheme was being used for such ventures as, ‘a launderette that offered to lower temperatures on its washing machines and a business that recouped money for staff performance reviews.’ Many businesses are adamant that the vast majority of claims are completely legitimate, a sentiment shared by Nordens. Our dedicated R&D specialist team veto the process of R&D claims. This ensures businesses are providing valid information to further innovation in the appropriate field.
Speaking to Times Radio, our CEO Mitch Hahn, stated, “There are lots of people who aren’t aware of the scheme. But the scheme is being taken advantage of, despite so many legitimate claims being put through. There are so many pop-up companies set up purely to take advantage of the scheme and HMRC’s lax approach. You can see online that these pop-up companies will put in a claim for any amount. This convinces the claimant to invest in R&D when they actually should not be.”
Mitch went on to say, “HMRC haven’t really thought about the way they review claims. The problem is these companies are putting multiple claims in. When HMRC do eventually spot a red flag and investigate, these companies are nowhere to be seen. Despite all of this though, R&D is a great scheme and is set up for great reason, to help develop and innovate sectors. A lot of boutique companies and pop up firms will use it as a tax loophole. When used correctly it isn’t a loophole at all and is a great thing for innovation.”
What Are The New Policy Changes To R&D?
HMRC have stated that since bringing in a new rigorous verification process this year, 80% of claimants who were asked for more information over compliance concerns, later had their claims rejected. On July 21st 2022, HMRC announced new reforms. These will apply for accounting periods beginning on or after 1st April 2023. These reforms are as follows:
Extending qualifying expenditure
To incentivise R&D using modern computational approaches, the government is extending the scope of qualifying expenditures. This is to include the costs of datasets and of cloud computing.
To further support cutting edge R&D, the government will make changes to the definition of R&D for the tax reliefs. This is to remove the exclusion of pure mathematics.
Refocusing the reliefs towards innovation in the UK
To ensure the maximum benefit to the UK from the spillovers of R&D activity incentivised by the reliefs, relief for subcontracted work and the cost of externally provided workers will be limited to focus it on UK activity. There will be some narrow exemptions. For example, factors such as geography, environment, population or other conditions that are not present in the UK.
Tackling abuse and improving compliance
To tackle abuse, all claims to R&D reliefs, either for a deduction or tax credit, will be made digitally. This is except companies exempt from the requirement to deliver a Company Tax Return online.
These digital claims will have to break down costs of qualifying categories and provide a brief description of the R&D. Each claim will need to be endorsed by a named senior officer of the company.
Companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this using a digital service. The claim will also need to be made within 6 months of the end of the period. Companies that have claimed in one of the preceding three periods will not need to pre-notify. Claims will need to include details of any agent who has advised the company on compiling the claim.
Will These Changes To R&D Reduce Fraud?
These changes are welcomed in tightening up the security over R&D claims. By outlining a senior officer of the company, as well as agent details who has advised on the claim, it provides evidence should HMRC need to investigate this further. These measures are expected to incentivise R&D spending on qualifying activities in the new tax relief regime. As well as this, these measures are expected to have a significant impact on approximately 90,000 businesses claiming R&D tax reliefs. One-off costs could include familiarisation with the changes and updating systems to reflect them.
At Nordens, we provide a detailed and high-quality service in R&D claims. This includes going over all financial information from clients meticulously with a fine toothcomb. It ensures all claims are legitimate and properly verified by ourselves before submitting to HMRC for approval. Nordens pride ourselves on providing a genuine service within R&D, helping to improve UK infrastructure and innovation for the greater good.
We hope this has outlined to you the new changes expected to R&D policy and why fraudulent claims have tarnished the reputation of R&D. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.