It is clear that the government recognises the importance of R&D for driving the economy’s productivity and long-term growth. R&D tax relief plays a key role in reducing the costs of R&D and therefore performs an important role in the government’s objective for productive investment in the UK economy.
Over 80% of R&D claims made in 2013/14 were made by SMEs. The number of SMEs claiming tax relief in 2013/14 has increased by around 19% to over 15,000 with the total amount of support provided through the SME scheme at £800m. This illustrates clearly the importance of the R&D tax relief to small businesses.
HMRC consulted on improving access to R&D tax credits for small companies in early 2015. The response document issued in October 2015 develops the ideas brought to the fore through the consultation and sets out the government’s plans for the SME regime over the next two years. HMRC’s consultation concentrates on the issues faced by small businesses in undertaking R&D and accessing R&D tax relief rather than the definition of R&D for the purposes of the credits. Four themes were identified as the key factors that influence access to R&D tax relief: Awareness, Design, Understanding and Administration.
So what do HMRC plan to do?
They plan to make more use of one-to-many communications such as email and Twitter to keep customers updated on R&D tax policy and technical developments – novel but I’m not sure how helpful.
They will look at ways to use its own data, and to work with other government agencies, to identify companies that have carried out R&D, but that have not yet claimed relief. This is a step forward, and more like the ‘joined-up’ approach that has been mentioned before now. My concern would be how many companies will HMRC actually be contacting directly to say they ‘should’ be making a claim? How will this work in practice?
An Advance Assurance service was launched in November 2015 and HMRC are currently trying to raise awareness of that service. Advance Assurance is intended to help the smallest companies by providing them with greater certainty in making their first claim.
The plan for design
HMRC plan on giving more guidance for use by subcontractors carrying out R&D, as well as expanding on current guidance around what exactly demonstrates R&D.
The plan for understanding
HMRC will issue improved guidance on the interaction of R&D tax relief and grant schemes in a state aid context. This is a complex area. Francis Clark have long been involved in direct conversation with HM Treasury, HMRC and BIS regarding the complexities around this subject. I am therefore pleased that this has been officially recognised and hopeful that better guidance will be issued in due course.
As part of the Advance Assurance service, HMRC will ensure that first time claimants have a better understanding of how the R&D tax relief rules affect their businesses. HMRC intend to produce further templates and guidance products to help smaller businesses to record their qualifying activity and qualifying expenditure.
To help smaller businesses that undertake software R&D, HMRC will explore the best ways to provide upfront certainty about what they can and can’t claim. Again as an area which we see ever increasing R&D claims being made this can only be a good thing and demonstrates that HMRC believe this to be an area of R&D where more claims could be being made.
The administration plan
As mentioned earlier, Advance Assurance was launched in November 2015, focussing on first time claimant smaller companies (turnover under £2m and fewer than 50 employees). It is a voluntary scheme and those who apply, and are successful can be assured that the company’s R&D claim for the first 3 years will be processed without further queries. This could be particularly helpful for those clients who are concerned that although an initial smaller claim could be accepted, a larger claim in a following year may be queried.
One always needs to remain wary to the disadvantage to some of these schemes. If there is some doubt over the development being carried out, and upon application to the Advance Assurance scheme the claim is rejected, it would then be impossible for a company to make a claim on this work. The balance will be how keen a company is on securing certainty before submission of a claim, versus a ‘hopeful’ submission.
What does all this mean for us?
The key proposals from the consultation are welcome and should go some way to improving both the quality and quantity of R&D claims being made by smaller businesses.
In particular, the Advance Assurance service should remove any uncertainty experienced by smaller businesses in respect of their eligibility for the credits and should allow such businesses to manage their cash flow more effectively and, in turn, encourage them to increase investment in R&D.
In my experience it is not necessarily the uncertainty of success that is preventing small businesses from making claims: it is the lack of understanding that what they are doing is ‘qualifying development’ work. By spreading the word of the claims, and explaining exactly how beneficial a claim can be to the company, this is something we continually aim to overcome.