The UK government has long provided substantial innovation tax reliefs, allowances and grants to stimulate economic growth.

There is a concerted effort to ensure that these benefits are targeted effectively and provide value to UK taxpayers. This has led to heightened scrutiny from HMRC, aimed at combating fraud and errors, a shift that is deeply impacting the market.

The current changes are reshaping the R&D tax relief environment, creating a dichotomy where some companies are seeing increased benefits while others are facing substantial decreases. This dynamic has sparked growing concern among businesses, as HMRC’s intensified crackdown is resulting in prolonged and exhaustive enquiries. There is also unease about the potential rejection of legitimate claims, thus deterring genuine innovation activities.

This insight explores the key themes affecting the R&D tax relief landscape and offers guidance on how to adapt your approach to claim preparation or defence. The central message is clear: traditional methods of preparing R&D claims no longer suffice to maximise available credits. In this challenging environment, it is crucial to partner with a trusted R&D specialist to effectively navigate these changes.

Key considerations in the changing R&D tax relief landscape

1. The merged R&D expenditure credit (RDEC) scheme

The merged RDEC scheme, effective for accounting periods beginning after 31 March 2024, replaces the distinct SME and large company schemes. While it retains many elements of the previous schemes, it introduces critical changes, including restrictions on overseas R&D and revised rules for ‘contracted-out’ R&D (i.e. who benefits when multiple companies work on the same R&D project).

These changes could significantly alter the benefits available to both SMEs and larger organisations. The merged RDEC scheme, currently offers a 20% taxable credit, usable to offset tax liabilities or as a refundable credit at 16.2% of qualifying R&D expenditure.

2. R&D intensity threshold reduction for SMEs

The R&D intensity threshold for loss-making SMEs to qualify for enhanced R&D intensive support (ERIS) has been lowered from 40% to 30%. This change expands eligibility for this more generous relief, which mirrors the former SME tax relief by providing a payable tax credit, now worth 26.7% of qualifying R&D expenditure.

3. New notification requirements for R&D claimants

For accounting periods beginning after 31 March 2023, new R&D claimants or those who haven’t claimed in three years must notify HMRC of their intention to file a claim within six months of the end of the accounting period. The deadline for filing claims remains unchanged, typically two years after the end of the period of account.

4. Updated HMRC guidelines for compliance

HMRC has issued new guidelines for compliance to help businesses avoid common mistakes in claim preparation. These guidelines emphasise the role of a ‘competent professional’ in identifying eligible R&D activities and stress the importance of a rigorous approach to claim documentation.

5. Reduction in fraud and error rates

HMRC’s recent annual report highlights that fraud and error rates in R&D claims are significantly down, from nearly 18% by value to current estimates of less than 8%. This reduction is attributed to new measures, like payment caps and the mandatory Additional Information Form, which have enabled HMRC to adopt a more informed, risk-driven approach to claim scrutiny.

6. Increased compliance checks and enquiries

HMRC has adopted a ‘volume compliance’-based strategy, with one in five claims now subject to compliance checks. However, there is growing concern that these measures may lead to lengthy and onerous checks, legitimate claims being rejected and genuine claimants discouraged.

7. HMRC behaviour concerns

There is widespread concern, highlighted in numerous press articles, that HMRC’s compliance activity has become overzealous. This includes what appears to be poor training many new staff, not adhering to the standards and policies set out in HMRC’s charter, whether the ‘volume’ approach is suitable for what remains a complex and subjective area, and increasing evidence that HMRC is using powers (under paragraph 16, s1138 of the Corporation Taxes Act 2010) to pre-emptively correct/remove R&D claims from tax returns, with over 2,100 instances in 2022 and 2023.

More significantly, in light of the estimated £4 billion cost of fraud and errors over the last four years, HMRC is increasingly applying penalties to non-complaint claims. It uses discovery powers to review claims over the last six years, even those ostensibly agreed.

8. Escalation of disputes and tribunal decisions

Companies facing disputes over R&D claims are increasingly turning to internal HMRC escalations so that senior, experienced officers are involved in resolving disagreements, statutory reviews, alternative dispute resolution, and First-Tier Tribunals (FTTs) as a basis for resolving different viewpoints. Notable recent FTT decisions, including the Quinn and Get Onbord cases, have found for the claimant, rejecting HMRC’s original position, particularly regarding subcontracted R&D, the qualifications required of a ‘competent professional’ and the importance of context for R&D projects rather than novelty being judged in isolation.

9. Shake-out in the R&D advisory sector

The advisory sector is experiencing a ‘flight to quality’, with HMRC establishing a dedicated R&D disclosure facility for breaches in adviser standards and disreputable or underqualified advisers exiting the market. This shift underscores the importance of partnering with advisers who have the expertise and capability (and capacity) to defend claims robustly.

10. Further changes ahead?

The new government is committed to growing the UK economy, and incentives such as R&D remain key. However, there are undoubted fiscal challenges ahead and ensuring value for taxpayers with significant non-compliance may drive further change, despite industry clamour for a pause to let the changes bed in. Potential changes relate to introducing a de minimis of claim sizes (a quarter of claims are for less than £30,000) and bringing expenditure on capital equipment into scope.

How we can help
In summary, the current turbulence in the UK R&D tax relief landscape demands a strategic, well-informed approach to R&D claim preparation and defence. Companies must stay vigilant and proactive. We can offer expert advice to help you maximise your R&D tax credits while helping you to navigate the evolving regulatory landscape. Contact us today.

If you would like more information on the recent changes in the world of R&D join MKS experts and Essex Chambers on Wednesday 23 October at the Adapting to the New R&D Tax Relief Landscape webinar. FREE to Members, this webinar is specifically designed to equip you with the knowledge and strategies needed to thrive in this evolving environment.