Panellists

• Stephen Relf, Technical Manager, Tax, ICAEW
• Richard Jones, Senior Technical Manager, Business Taxation, ICAEW
• Angela Clegg, Technical Manager, Business Taxation, ICAEW

Producer

Ed Adams

Transcript

Stephen Relf: Hello and welcome to The Tax Track, the podcast series from ICAEW, where we explore the latest developments in the world of tax. Our subject for this episode is research and development (R&D) tax relief. In recent years, we’ve seen changes to the rules, to processes and to HMRC’s approach to policing claims. In this episode, we’ll map out the current landscape to help you navigate your way through it. We’ll start with HMRC’s compliance approach, explaining why more claims are being checked and the impact that’s having on businesses.

Angela Clegg: We do have a number of concerns around HMRC’s compliance approach. Our biggest concern is that some compliant claims are being disrupted.

SR: We’ll then move on to a new HMRC facility, to disclose errors made in claims. Who can disclose, how to disclose, and the points to consider in determining whether or not a claim is correct.

Richard Jones: Make use of the facility because that could potentially reduce your exposure to interest and penalties.

SR: I’m Stephen Relph, a Technical Manager for Tax at ICAEW. Today I’m joined by two colleagues in the Institute’s Tax team, both of whom specialise in business taxes. Welcome, Richard Jones, Senior Technical Manager, and Angela Clegg, Technical Manager.

Now, Angela, R&D tax relief has been a hot topic over the last few years as successive governments have sought to close the tax gap. Can you tell us more?

Angela Clegg: Yes, I think it’s fair to say fraud and error in the R&D tax regime has been under discussion for many years, but it’s not been at the forefront like it is today. ICAEW and its members have advised HMRC for a long time around the need to police the system better. Our members have advised us of bad practices that they’ve seen. It is unfortunate that where you have a relief that is very generous and HMRC compliance activity is very low, it can get abused, and that is what’s happened with R&D tax relief. Some of HMRC’s statistics in this regard are actually quite alarming, such as 50% non-compliance in the SME regime. We see large increases in claims in the quantum and the volume of claims. So all this – this environment – has led to a real crackdown on claims and much more compliance activity from HMRC.

Richard Jones: It’s fair to say, I think, that some of those statistics are really quite surprising, both to us and our members.

SR: So how did the government and HMRC respond to that?

AC: Well, we have had a lot of changes in the R&D regime. One of the biggest ones is we now have a merged scheme. We used to have the SME scheme and the scheme for larger companies, the RDEC scheme. We’ve also got a real tightening of the eligibility of costs. In particular, overseas costs are generally not eligible. There are some very specific exceptions to this, but they look quite difficult to get into.

With all these changes in rules, the merged scheme and these eligibility changes, we haven’t seen much HMRC activity yet. They’re relatively new rules, so we’re yet to understand how these will work in practice. Whereas we used to have the SME regime, we now have the regime for R&D intensive companies. But it’s fair to say this is narrower than the old SME scheme and is largely aimed at start-ups. But I think with all these changes and the increased compliance activity, what we are seeing for claimants is a very challenging environment.

SR: So in terms of HMRC’s compliance approach, that’s focused on the legacy regimes, the SME regime and the RDEC?

AC: It is currently, yes, because we’ve not actually had the time yet to see returns submitted under the new regime.

SR: And the statistics you mentioned – we have got a short article accompanying The Tax Track – they do seem to suggest that HMRC’s tougher approach is having the desired effect. Is that the feedback we get from members, and also, do we have any concerns how HMRC is checking claims?

AC: Well, we do have a number of concerns around HMRC’s compliance approach. It is what they describe as a volume-based approach, so we are seeing many more enquiries into claims. Our biggest concern is that some compliant claims are being disrupted. We did do an ICAEW briefing to the new government, to new MPs, which summarised these concerns in more detail and is available on our website.

It is worth noting that members don’t have full confidence in HMRC’s statistics. We don’t have full oversight of the detail behind their statistics, but we understand that non-compliant is very binary. So it could encompass a negotiated settlement, where a company concedes a position in the interests of expediency to avoid protracted debate and possibly a tribunal. It could include a very small error in the context of a large claim, and it does include withdrawal of claims, so that will be where perhaps the cost of defence is disproportionate in relation to the size of the claim. We know that is obviously more prevalent in the SME sector. What we don’t have, really, is a full picture from HMRC numbers of what they actually mean.

SR: Does anything stand out in particular as causing problems?

AC: We also understand that the Revenue is using what we would refer to as paragraph 16. Now, paragraph 16 is a revenue correction, so it’s where the Revenue, without an enquiry or a compliance check, will amend a return and, in the case of R&D, perhaps remove the claim. The taxpayer can reinstate that claim and reject the amendment, but an enquiry is obviously quite likely after that.

What is unusual in the context of R&D is that typically, this paragraph 16 has been used to correct very obvious errors. We would be thinking arithmetical errors in the return, or perhaps HMRC receives information from a bank that some source income has been missed. So, really indisputable errors, it tends to be used for. In the context of a technical issue like R&D, it is unusual to see it used in this way, and members have raised concerns around it being used in this manner.

The other thing we are seeing is potentially claims being sent to Debt Management & Banking prematurely. Debt Management & Banking is the area of HMRC which chases debts and collects the debts that are due. Tax amounts should only be going there when they are fully decided, the underlying technical treatment is agreed. We’re advised that sometimes disputed amounts are ending up there before members feel that those amounts are actually agreed. That is obviously commercially difficult to manage and very stressful for clients if they’re getting chased for amounts of tax that they don’t believe to be due. So the key to that is seek advice. Make sure that all revenue processes have been followed, because we’re advised that that isn’t always the case. If you receive any assessments, closure notices, make sure they’re appealed in time. You tend to have 30 days, but again, make sure you get advice on that. You can submit late appeals but they are difficult, so challenge any missed processes by HMRC and get those claims in on time.

SR: Clearly, you’ve had a lot of feedback from members when it comes to R&D enquiries and checks. I know that you and Richard have been very active so far in taking that feedback to HMRC, and I know you’re going to continue to do that through forums and different approaches. We will provide updates on that work as and when we can, either in this podcast or articles in TAXwire or TAXline.

Richard, a more recent development is that HMRC is now encouraging companies to disclose errors with a new disclosure facility. Could you explain who can use that, please?

RJ: Yes, Stephen. So this is something that came in on 31 December 2024, New Year’s Eve. It applies where a company has made an error in a claim, in an R&D tax relief claim, and they’re basically out of time for amending their return – that’s usually two years from the end of the accounting period. There is either some additional tax to pay as a result, or some tax credits to pay back, and the company needs to have made an error that wasn’t deliberate. It could just be an innocent error, or it could be careless or potentially negligent, but not deliberate, because there may be a more appropriate mechanism to inform HMRC of those.

It can either be the company itself that makes the disclosure, ie, via the company secretary or a director, or it could be the agent, if there’s already an agent authorised, and that’s great. Otherwise, you need to use COMP1a to authorise a new agent.

SR: Is it relatively straightforward to use the facility to make a disclosure?

RJ: Well, it’s as easy perhaps as it can be. These disclosure regimes tend to be issued through a Google form, so obviously that has its own limitations. But basically what you have to do is submit the online form along with supporting calculations, and then you also have to send HMRC a letter of offer, and that sets out what you believe to be the additional tax, interest and penalties that are due. HMRC will then either accept the letter or they will ask for more information – so presumably then there will be some toing and froing and eventual agreement. And then the company has to pay any outstanding liability within 12 months of the date of the agreement. For example, under the time to pay arrangement.

SR: Are there any points you would make to members who are thinking of using this as to the advantages and disadvantages?

RJ: I think the main reason why you might want to use the disclosure facility is if, as a company, you’ve discovered you’ve made an error in an R&D tax relief claim, or as an agent, you’ve found that one of your clients has made an error and you’re within time… well, firstly, if you’re within time to amend the return, then amend the return, but if you’re out of time, I would say, yes, make use of the facility, because that could potentially reduce your exposure to interest and penalties, particularly penalties.

For example, the amount of penalty that’s payable in any direct taxes is related to whether or not HMRC has prompted that disclosure. So if you make an unprompted disclosure, then the penalties are likely to be lower, whereas if you wait and potentially have an HMRC enquiry, then you could incur much higher penalties.

One thing to look out for is make sure you involve both an R&D specialist and also a compliance and investigation specialist. So if you feel, as a member, you don’t have experience in either of those, then you might want to seek out some additional advice from a specialist in the field.

SR: That is very good advice. I think, there are lots of challenges from this, from what you’ve said – not least, first of all, in identifying the error and calculating the tax, but then also the interest and the penalties. Calculating those will be challenging too.

Now, so far we have mainly focused on errors. Angela, where could a business or an agent look for guidance on getting it right in the first place?

AC: Well, HMRC does have guidance on the gov.uk website. It is found in the Corporate Intangibles Research and Development Manual or CIRD Manual. These are manuals that HMRC staff are pointed to as guidance. There’s also a Guidelines for Compliance on R&D. These guidelines are part of a series, so there’s a number of tax topics. They are an education piece aimed at helping taxpayers get their liabilities correct, so they’re not formal guidance or statute but very much there to help and advise.

However, what we would say is that recent court decisions indicate that HMRC don’t always get this right. There’s been a large dispute around subcontracted and subsidised expenditure, which has played out in the First-tier Tribunal. We’ve seen HMRC losing three cases: Quinn, Collins Construction and the Stage One Creative cases were all won by the taxpayer. The issue at play here is around the definition of contracted out and subsidised expenditure, because these are ineligible for relief under the more generous SME scheme. So we are in the old rules, but in the time when we didn’t just have one merged scheme, as we do today. But these three judgements are significant judgements for the taxpayer, and we do expect to see some movement on open enquiries. But I think, Richard, you’ve got a little bit more detail on this?

RJ: Yes. The Collins and the Stage One cases are relatively recent, towards the end of last year. Two of the three things that they hinged on were, firstly, whether the expenditure was considered to be contracted out, and then secondly, whether it was subsidised. In both cases, what happened was that there was a major customer asked those companies to carry out some work, but in order to carry out the work, they needed to do some R&D to work out whether they could fulfil that contract. And so HMRC argued, firstly on the subsidised point, that the customer had effectively subsidised the expenditure. The FTT said, well, there needs to be a clear and direct link between the customer’s payments and the qualifying expenditure, and they found that wasn’t the case in either of those two cases.

Then on the subcontracted-out point, HMRC tried to argue what they called a freestanding R&D argument, and that was that R&D wouldn’t have taken place had it not been for the customer contract. And so that was enough for them to argue that it was contracted out from the customer to the claimant. But again, the FTT rejected that argument. So HMRC lost on both counts.

HMRC is not planning to appeal. In fact, it said it won’t appeal either of those cases, but it also said that it was going to issue some more correspondence to anyone who’s got an open enquiry who’s standing behind those decisions. And also they’re going to issue new guidance, but we don’t know yet what that what that’s going to say.

Now, because these cases were only heard at the First-tier Tribunal, that doesn’t create legal precedent. But there is this concept of judicial comity, which says that if a court has made a decision, then other courts should respect that, unless it can be explicitly demonstrated that those decisions were incorrect in law. And what actually happened in the FTT cases here was that they considered the earlier Quinn case and said that they found that that case had been correct in law. So it’s pretty likely that the same thing will happen here, should it be considered in future cases.

So we’re in a bit of an uncertain situation here at the moment with regards to subcontracted and subsidised, particularly when it comes to client contracts. And also, as Angela alluded to, we’re now coming under a new merged scheme where there’s no restriction on subsidised expenditure, and the test for subcontracted-out work is completely different. So it’s possible that we’ll end up with a whole new body of case law relating to that definition in the coming years.

SR: You mentioned subcontracted/subsidised – and as you say, they have changed. What hasn’t changed is the definition of R&D. I know, Angela, there have also been some cases on that as well, haven’t there? Have they helped us understand more of what that means?

AC: Yes. The judgement of Get Onbord has received quite a lot of attention. In this one, HMRC argued that the company’s activities did not meet the criteria for R&D as outlined in the BEIS guidelines. Now we refer to that as the DSIT guidelines – it changed its name. Now the First-tier Tribunal disagreed with HMRC. We are again, as I mentioned earlier… we are hearing this is quite a typical approach, with HMRC either denying R&D took place at all or fully accepting it.

This case made some useful findings, which might be of practical use to several claimants. One of the first ones was that someone who has experience and up-to-date knowledge can be a competent professional even without formal qualifications. Similarly, the use of existing technologies is okay, providing the project involved an overall increase in capability in that field of science and technology, and that the development wasn’t just routine. And I think one of the most interesting recommendations that people have pointed to is that, as well as the company being required to provide evidence of how it meets the criteria in the BEIS guidelines, HMRC should also provide details of their own scientific analysis and evidence.

I think this will resonate with many of our members, because we’re hearing frustrations that HMRC will deny relief, but not necessarily elaborate enough on why it’s denied or why it doesn’t meet the criteria. So that judgement, I think, is quite interesting for our members.

SR: That’s four cases we’ve talked about so far, all of which were victories for the taxpayer, at least in front of the First-tier Tribunal, as Richard said. Are there any victories for HMRC in front of the courts?

AC: We have seen Flame Tree. The First-tier Tribunal found in favour of HMRC, without hesitation really. This again highlights the importance of a competent professional in your claim providing evidence, and it also reiterates the burden on claimants to be able to substantiate their claim. So that is the quantum; any areas of judgment are particularly important. In this case, we had allocations of employee time and costs, but then the claimant was unable to substantiate those and verify those. This case also indicated that having some knowledge as a business owner isn’t necessarily enough to be a competent professional. The individual must possess expertise, and this must be evidenced by relevant experience, skills or qualification. So an owner having a dabble is not going to be enough.

SR: In the show notes, we do have a link to an earlier article, which includes a useful table of recent decisions in front of the FTT. It includes summaries of those cases but also others, so it’s a great way to see if anything is of use in those decisions for your situation.

As Angela mentioned at the beginning, we have had a lot of change when it comes to R&D rules in the last few years. Richard, are there any other issues which new claimants may want to consider before they make claims for the first time?

RJ: The first thing I was going to mention here was a change that was brought in in 2023, and this is a notification requirement. Essentially what this does is require any new claimants – and by that I mean anyone who’s not made a claim in the previous three accounting periods – to inform HMRC of its intention to make a claim. That has to happen within six months of the end of the accounting period concerned, so any company that misses that deadline can’t make a claim for that period. That’s pretty harsh, so companies really need to make sure that they take notice of that requirement and act on it.

The other thing that we have been talking to HMRC about – I know they have also been in discussions with other parties – is potentially changing or replacing the current advance assurance system. This is something that hasn’t really been taken up very widely since it was introduced several years ago. We’ve had feedback from members saying that their clients tend not to use it because they see it as involving a lot of extra work, perhaps as much as dealing with an enquiry, but it doesn’t actually give them any absolute certainty or guarantee that any subsequent claims will be accepted.

HMRC is looking at options at the moment to make a new scheme happen, or amend the existing scheme in a way that gives claimants more certainty and more of an incentive to use it. We’re continuing to discuss that with HMRC, and hopefully we’ll get some movement this year on that.

SR: It’s a good point you make about the six-month deadline from the end of the period to notify HMRC. I, for one, hadn’t realised it was quite so short, especially given the longer deadline you have to pay the corporation tax, submit the return. So it’s definitely worth remembering that one.

Now, another recent development as well in the last few years was the introduction of the additional information form. How has that been settling in?

RJ: Well, there’s been quite a number of, dare I say, teething problems, which perhaps you might expect with a new facility of this type. This was another development that happened in 2023 – in fact, August ’23 I think it came in – for any claims happening after a particular date, rather than relating to a particular accounting period. That’s very much a hard introduction.

Some of the things that our members have been noticing or having problems with… First of all, there was a little bit of uncertainty and a lack of clarity around the detail that you needed to provide in relation to projects. For example, in a particular claim you might have five projects, R&D projects, in a year, or 10, or whatever. And so HMRC actually put out guidance, which was… well, it’s not correct… around the sort of detail you needed to provide. That’s since been corrected, but for a number of months that created quite a bit of uncertainty.

We’ve also been hearing that HMRC has been rejecting claims where there have been very small admin errors included in the form, for example, including the wrong UTR or making an error in that. Again, that seems a little bit harsh, and we would hope that HMRC would use more discretion in more situations.

There’s also been a bit of uncertainty around what disclosure you need to make around the agent that’s been involved in the claim. There’s actually only two boxes on the form. One of them is R&D agent, and the other one is R&D agent and main agent. So if there’s only one agent involved – in other words, there hasn’t been an R&D specialist involved in the claim, just the agent that would normally complete the computations and the returns – then that agent has to tick R&D agent, which isn’t what you would expect. So there’s a bit of uncertainty around that as well.

Also, as Angela alluded to, there’s been information provided in the additional information form, in the AIF, where HMRC has asked questions that have already been provided in the form, and that’s been providing a lot of frustration with our members as well.

HMRC has also put in a proposal – this was in the latest Tax Administration Framework Review consultation – to extend additional information forms to other forms of claims. We recently submitted our response to that consultation, and one of the things we said was, well, if you’re going to introduce this for other areas, you really need to learn the lessons from the R&D AIF. Look at what went right, look at what went wrong, and see if you can build that into any new requirements. So let’s wait and see what happens with that.

SR: It’s clear to me, from today, that R&D tax relief is probably the most complicated and contentious area of tax at the moment. With that in mind, I hope this has been helpful for you, but also please do ensure that you do meet your obligations under PCRT if you are involved in advising on R&D tax relief. Topical guidance is available. I understand this is being reviewed and updated – watch out for developments in TAXwire.

That’s it for this episode. Many thanks to Richard and Angela for your contributions, and thank you for listening.

All of the topics we’ve discussed today are covered in more depth in the articles linked in the show notes. If you found this useful, then don’t forget to subscribe so you never miss an episode. You can rate and share the podcast too.

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