October 3, 2023 Nudging R&D
“R&D tax relief supports companies that work on innovative projects in science and technology.”
That’s the opening statement on the government guidance on research & development reliefs available to large, medium, and small corporations. And it has to be said that R&D reliefs can be a valuable resource for companies that are looking to develop innovative science or technology solutions. So much so that in the tax year 2020/21 the total R&D relief claim amounted to £6.6billion.
At the time of writing SME R&D tax relief enables companies to deduct 186% of their qualifying costs from their yearly profit or claim a payable tax credit if the company has claimed relief and made a loss. Larger corporations and some SMEs who don’t qualify for SME relief can claim expenditure credit, which for expenditure arising since 1 April 2023 amounts to 20% of eligible spend.
However, because it is such a potentially valuable resource, R&D credits can be open to misinterpretation or even potential fraud. For example, HMRC advises that “the work that qualifies for R&D tax relief must be part of a specific project to make an advance in science or technology.” They further state that companies in the arts, humanities, or social sciences including economics are unlikely to qualify.
Currently, HMRC estimates that in the year to 2021, incorrect claims due to error or fraud could amount to some £1.13billion. In order to counter this, in the summer of 2022 HMRC started to send out nudge letters, asking companies to check if their claim was accurate.
From sending out letters to existing claimants and then to first-time claimants, HMRC has now moved on to look towards pre-emptive nudge letters. Its latest target is the Care and Nursing Home sector; businesses that would be very unlikely to qualify for R&D tax reliefs. However, according to AccountingWeb, this sector has been targeted by agents which have persuaded care homes to let them put in a claim on their behalf, take a commission, and then when HMRC rejects the claim leave the home to repay the entire amount.
The advice given by HMRC in the nudge letters is pertinent to all businesses which are cold-called by R&D agents. This includes basic business practices such as checking if people are qualified to advise and ensuring that you are fully aware of the terms and conditions of any scheme. In particular, companies should be cautious if any information received about R&D sounds too good to be true.