Pitfalls of R&D tax breaks

Research and development tax relief is helping make more UK businesses world-class by encouraging greater innovation.

The scheme enables companies investing in product or service improvements to apply for significant tax breaks and it appears to be working. A 2015 evaluation by HMRC suggested that, for each £1 of tax foregone, businesses were spending between £1.53 and £2.35 on R&D. In Scotland, R&D spending is also rising, topping £1 billion for the first time last year.

This is music to the ears of the UK government but there have been growing concerns about illegitimate or overblown claims. In last year’s Autumn Budget, as the Chancellor announced a further £2.3bn investment for R&D tax relief, he also put forward an additional £155 million to help HMRC tackle tax avoidance, evasion and non-compliance. This means there’s a bright future for companies wanting to innovate and get a tax break for doing so. Claiming R&D tax relief will, however, become much more difficult, with grim consequences facing those that get it wrong.

The extra resources for HMRC will further enhance the crackdown by the agency’s Large Business Directorate where a quarter of the value of all claims were challenged last year (compared with only 6 per cent in the previous 12 months). Forty per cent of large businesses making claims over the 2016-17 period were investigated and, with additional Treasury funding for HMRC, that figure will probably rise.

From our ongoing discussions with HMRC about non-compliance, providing clarity about overcoming technological uncertainty when investing in R&D is a key area where many businesses are falling short in their tax relief claims. The mistreatment of grants and incorrect headcount allocations are additional issues which can also result in rejected claims.

Getting it wrong can be disastrous for a business as it could initially be subjected to a review of its tax records from the previous six years. This could then be extended to 20 years if HMRC inspectors believe deliberately misleading transactions have been submitted. Those that breach the rules not only face having an existing claim fully retracted but also put at risk their eligibility on any future claims.

Given the tightening R&D tax relief regime, it is vital for companies that are making claims to be thorough in demonstrating what qualifies as expenditure on innovation, clearly highlighting how this would increase competitiveness. Every business will want to claim the maximum amount of R&D tax relief but it’s now more important than ever that this is done applying an in-depth understanding of how an investment in innovation will raise the baseline in their particular industry. •Scott Henderson, managing director at R&D tax relief specialist Jumpstart