HMRC’s plan for small business R&D tax relief

John Moore, November 2nd, 2015 John Moore

At the end of October 2015 HMRC published their plan for an administrative framework for the next two years and beyond to enable the smallest companies to more easily claim R&D tax relief. Although the framework is most likely to affect those companies currently claiming under the SME scheme, elements of it will be applicable to small companies who have to claim under the large company and R&D expenditure credit (RDEC) R&D tax relief schemes as well.

Following a consultation carried out earlier in the year HMRC have listened to the views of over 200 respondents including companies and their advisers to try to focus the tax relief schemes and ensure that they are accessible as they can be.

The framework will focus on the four key themes of Awareness, Design, Understanding and Administration. In addition it will contain a new Advance Assurance programme designed at enabling the smallest first time claimants to obtain some upfront assurance that their claims will be agreed by HMRC for the first three years.

Awareness

HMRC have agreed with businesses that they need to be more aware of the relief upfront to effectively incentivise the carrying out of more R&D. In particular they want to get across the message that R&D tax relief is not just for pure research but is available for a wide range of scientific and development activities. HMRC have said that they will seek to use email and Twitter to keep companies aware of the opportunities.

Design

The consultation indicated that many respondents were happy with the current design of the scheme including the definition of R&D and the existing qualifying cost base. HMRC are going to produce more guidance on the areas that respondents have indicated cause problems in practice such as the treatment of subcontractors and on the definition of a scientific or technological advance.

Understanding

HMRC have committed to improving the R&D guidance and in particular are looking at different ways of providing it, rather than just updating it e.g. They have said that the format of the guidance should provide some non-text elements to better convey complex areas. In addition to the improved guidance under the Design head above, they are also looking to provide more clarity to companies undertaking software R&D by exploring the best ways to provide upfront certainty about what they can & can’t claim. More guidance will be produced on the interaction of R&D tax relief and grant schemes in a state aid context, an area which is very complex in practice and has led to misunderstanding, and in our opinion a likely under claim of the reliefs available. Importantly the new guidance will be specifically aimed at how the rules affect small businesses.

Administration

Perhaps the most radical change here will be the introduction of the formal process of Advanced Assurance for small companies claiming R&D relief for the first time. This will launch in November 2015 focussing on first time claimant companies with turnover under £2m and fewer than 50 employees. It is voluntary & non statutory and is designed to give successful applicants assurance that HMRC will allow their first three years of R&D claims without further enquiry. Full details will be published in due course, although we anticipate that the assurance will only apply to the R&D activities and the qualifying cost categories and not to the amount of the costs in the claim. Clearly there will be issues which make this process more complex in practice than it appears at first sight including the nature of the R&D projects over the three year period and the calculation of the costs in each period. We believe that HMRC will still require companies to supply supporting information when submitting their R&D claims.

Our view

HMRC’s commitment over the next two years to aiding the understanding of the complex schemes from the point of view of the SME claimant population is to be welcomed. We believe that, with the Advance Assurance programme, is clear is that that HMRC want to put in place a process, built on an upfront understanding of the claim methodology, that gives companies more confidence in the outcome of the claim process so that they can build this effects of the relief into their decisions to invest in R&D. We believe that there will still be an important role for advisers to assist companies in developing their claim methodologies and in assisting HMRC to understand the nature of the companies’ activities under this process so that the claims are optimised and the assurance process is undertaken as efficiently as possible.

We will keep you informed of the next phase of this programme when the details of the advance Assurance scheme are published in November 2015.

Please do not hesitate to contact John Moore on 0207 292 8850 or at john.moore@kinglybrookesllp.co.uk if you would like to discuss the implications of this for your company.

This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.