R&D regulations are changing as of 1st August 2023. In an effort to tackle fraudulent R&D claims that have been draining millions from the UK economy, new administrative regulations will come into effect. While these regulations aim to weed out deceptive practices, there is a concern that legitimate claims from true innovators may be overshadowed or discouraged due to the increased amount of information required to support future claims.
R&D has long been seen as an incredible incentive to drive forward innovation and development across all UK industries. With the changes inevitably having an effect on R&D applications and interest, could the new regulations cause more harm than good?
We analyse and explain exactly what is changing come 1st August, and why the government have decided to do this…
What Are The New R&D Administrative Regulations?
HMRC recently launched a campaign against malpractice, announcing that businesses submitting R&D tax relief claims will now have to provide significantly more information compared to previous requirements. Moreover, this information must be provided in a digital format. The additional information forms will break down the costs across qualifying categories, list projects, and provide a detailed description of the R&D endeavours. This includes explaining the scientific or technical advancements the research aims to achieve.
Furthermore, each claim must be endorsed by a named senior officer of the business, and any agent who assisted in compiling the claim must also be identified by name. In addition, businesses that have not made a claim in the past three years must inform HMRC of their intention to claim within six months after the end of their accounting periods.
These changes may come as a surprise to many businesses, as they have received less attention compared to recent news about reductions in R&D Tax Relief for SMEs and the proposed merger of the two existing R&D tax relief schemes.
However, this move should be applauded, as it represents a significant step towards reducing fraud and malpractice within a poorly regulated market. Requiring named employees and agents on the claim form will discourage fraudulent practices, thereby protecting the integrity of the system. While businesses already adhering to the additional information guidelines will not be greatly affected, companies that have tried to exploit loopholes and operate unnoticed will feel the impact.
In recent years, HMRC has witnessed a surge in investigations into R&D tax relief fraud, mainly due to the proliferation of unregulated R&D tax consultancies. This, coupled with the financial burden placed on the Treasury due to R&D tax credits, necessitates a comprehensive response.
Why Are HMRC Clamping Down On R&D Fraud?
According to HMRC, it is estimated that the level of error and fraud within Corporation Tax R&D reliefs amounts to £469 million or 4.9% of related expenditure. This includes £430 million (7.3%) in the SME scheme and £39 million (1.1%) in the RDEC scheme.
The latest data from the Office for National Statistics (ONS) reveals that in 2020, expenditure on R&D conducted in the UK reached £61.8 billion, representing a £2.1 billion increase compared to 2019. The business sector accounted for the largest portion of R&D expenditure at £44.0 billion (71% of the UK total), followed by the higher education sector at £13.9 billion (22%).
R&D tax reliefs play a vital role in incentivising investment in research and development by reducing the costs associated with innovation. Recognising the evolving landscape of technology, the government is extending the scope of qualifying expenditures to include the costs of datasets and cloud computing.
R&D’s Future & How Nordens Can Help
With the implementation of these new administrative regulations, the UK aims to strike a balance between curbing fraudulent claims and fostering a supportive environment for genuine innovators.
Businesses should now shift their focus from viewing the claim as a whole to considering it on a project-by-project basis. It is crucial to carefully and robustly capture the time and costs associated with each project. This meticulous approach sets the bar for future claims, leaving no room for shortcuts. This is something we are more than adept in at Nordens. We pride ourselves on providing a genuine service within R&D, helping to improve UK infrastructure and innovation for the greater good. It ensures all claims are legitimate and properly verified by ourselves before submitting them to HMRC for approval.
By tightening the requirements and focusing on project-specific information, businesses will need to demonstrate the true value and impact of their R&D endeavours. Ultimately, these changes will contribute to the continued growth and success of the UK’s innovation ecosystem.
We hope this has outlined to you how R&D administrative regulations are changing and why this is happening. If you’d like to know any further information, or anything accounting related, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.