Azets blames admin changes for big fall in SME R&D tax credits claims
THE number of small or medium-sized firms claiming research and development (R&D) tax credits has dropped by 23% in a year, the latest statistics from HM Revenue and Customs (HMRC) have revealed.
This decrease has been put down in part to changes in the way claims are administered which require business to submit much more information than was previously needed, as part of HMRC’s campaign to identify malpractice.
HMRC’s annual Research and Development Tax Credits Statistics show the provisional estimated total number of R&D tax credit claims for the tax year 2022 to 2023 was 65,690, a decrease of 21% from the previous year. There were 55,325 SME scheme claims and 10,365 RDEC scheme claims.
The total is made up of the 23% decrease in the SME scheme and a smaller decrease of 9% in the Research & Development Expenditure Credit (RDEC) scheme which was available to companies with more than 500 employees.
The estimated amount of total R&D tax relief support claimed was £7.5bn, an increase of 1% from the previous year, which corresponds to £46.7bn of R&D expenditure, 4% higher than the previous year.
HMRC says the information and communication, manufacturing, and professional, scientific and technical sectors made up 67% of the total claims.
Heather Williams, tax partner at UK top 10 accountancy firm Azets, said: “This large fall in SME claims can be put down in part to the implementation of the additional information form (AIF) for claims made after August 8, 2023.
“Allowable only in a digital format, this includes breaking the costs down across qualifying categories, listing projects and providing a detailed description of the R&D, as well as describing what advances in scientific or technical knowledge the R&D is hoping to achieve.
“Each claim also needs to be endorsed by a named senior officer of the business, and any agent who has advised on compiling the claim must also be named. Businesses which have not made a claim in the previous three years must also inform HMRC of the intention to make a claim within six months of the end of their accounting periods.
“However, while the changes will have had little impact on businesses which are already complying with the additional information guidelines – such as those advised by Azets – it will have had big ramifications for companies who may have previously been attempting to possibly circumvent the regulations.
“We welcome these administrative changes as a significant way of weeding out fraudulent claims and ensuring that malpractice is minimised by improving compliance in a poorly regulated market.
“In short, the ‘ambulance-chasing’ unlicensed agents looking to make a fast buck by submitting fairly unsubstantiated claims of behalf on unwary clients will need to find new targets.”
The latest available HMRC figures show the estimated cost of fraud and error in the scheme to be more than £4.1bn from 2020-21 to 2023-24.
HMRC also says fraud and errors in R&D tax credits claims decreased from 4.9% to 3.6% due to the implementation of digital submission mandates, AIF requirements and increased scrutiny.
Latest available figures from the ONS (Office for National Statistics) show that The UK government’s net expenditure on R&D rose to £15.5bn in 2022, from £14.0bn in 2021, an increase of 10.5%.
The HMRC statistics are based on R&D relief rates prior to the reform of the system to bring the two schemes closer together and do not fully reflect its impact.
For accounting periods beginning on or after 1 April 2024, a new, single expenditure credit scheme was launched for companies of all sizes.
Two R&D reliefs are now available – the merged SME and RDEC schemes alongside the new Enhanced R&D Intensive Support (ERIS) designed for R&D intensive, loss-making SMEs.
The government says increasing the amount of R&D carried out by companies is a key part of its aim to increase productivity and promote growth. R&D tax credits support business investment by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs.
Heather has written to chancellor Rachel Reeves ahead of the 30 October Budget on behalf of clients, presenting key proposals to simplify and strengthen the current R&D tax relief scheme.
The letter calls for a more business-friendly framework that offers clearer, more accessible support to foster innovation and drive growth across the UK.
She said: “The UK’s R&D tax relief system plays a crucial role in encouraging innovation, particularly for small and medium-sized enterprises (SMEs). It provides funding that helps businesses develop new technologies, fostering growth across a range of industries.
“However, there are growing challenges around complexity, uncertainty, and clawbacks that highlight the need for reform within the current system – reforms which could help ensure that R&D tax relief continues to support innovation effectively.
“By simplifying the system and providing clearer guidance, businesses would be better able to navigate the process and access the support they need to innovate and grow, thus ensuring that research and development continues to play a vital role in driving the UK’s future economic growth and ambitions to remain a global leader in innovation.”
Heather has proposed simpler rules, more certainty for businesses, equal treatment across industries, relief for significant inventions, unified rules for innovation-related reliefs, effective fraud prevention, simplified patent taxation, clearer approval processes, specialist expertise in assessing claims and additional funding avenues.
She added: “We need more people driving innovation not fewer. My proposals would still enable HMRC to fight fraud but also incentivise real growth areas. There is such a danger that an attitude perceived as negative will hamper growth or it will be taken abroad.”
Letter to the chancellor: https://www.azets.co.uk/news-insights/articles/the-future-of-r-d-tax-relief-a-call-for-a-more-simplistic-and-supportive-regime/
She has also called for more awareness of video games tax relief (VGTR) as she fears many of the 2,200 games companies in the UK’s £2.8bn industry are missing out on vital development funding with just 345 claimants in the year ending March 2022.
