The New R&D regime is now established

The new R&D regime which came into effect on 1 April 2023 is now up & running and established. 

The new regime was introduced to tidy up the R&D sector and reduce the number of fraudulent claims being submitted to HMRC; an introduction which we have welcomed. 

Unfortunately, the regime does not yet appear to be working as smoothly as it could, either due to lack of experience by the new HMRC officers dealing with the R&D process or an over eager HMRC management team looking to reduce the number of claims by making the process much more difficult.    

Along with the changes to the R&D regime is the introduction of increased case reviews by HMRC. These case reviews appear to be driven by SIC code (Standard Industrial Classification) filtering of companies by commercial sector and not by the quality or content of the supporting R&D reports. 

SIC codes appear to be utilised as a filter to identify commercial sectors which may not be generally expected to undertake development projects. Claimant companies appear to then to be randomly selected for review without any reference to the actual supporting project narrative usually already provided. This random system in many cases, selects fully compliant R&D claims for review, which would not be selected if the R&D Report had been reviewed by HMRC prior to the opening of the review.    

The R&D review process is hampered again by the lack of experience of the new officers undertaking the checks into claims. As such, the sector has seen UK.GOV Innovation Award winning projects being rejected by HMRC officers on the basis that they had seen similar projects on an internet search.  

A further rejection example related to the development of medical equipment by experienced medical professionals on the basis that the development was simply an alternative use of an established device, the device being light. 

The reviewing officers appear to have little knowledge of R&D or qualifications which would allow them to question the competent and qualified professionals undertaking the developments.  

Hopefully as the experience builds in the HMRC R&D team, they will focus on specific fraudulent claims and not random selections based on their pre-conceptions of industries in which they believe R&D would not normally take place.     

A further update to the administration of the R&D process was introduced in August 2023, in the form of an additional R&D submission process called AIF (Additional Information Form).  The AIF is required to be submitted to HMRC via an online portal in advance of the submission of the R&D claim within the Corporate Tax Return.  Essentially this has the effect of requiring the R&D claim to be submitted to HMRC twice and in two different formats, so creating a further burden and cost for the claimant Company.  

The above has resulted in companies deciding to not to pursue R&D on what would appear to be fully compliant and qualifying developments, and so possibly limiting future investment by UK based development companies. 

The UK’s R&D reliefs don’t exist in a vacuum, they’re designed to encourage investment and innovation in the UK and it make it the best place to engage in research & development activities, but what other countries do matters too. The UK government will have noticed that our closest neighbour Ireland has recently announced it is substantially increasing its R&D tax credit rate, as such we will have to wait and see whether this succeeds in enticing companies away from the UK to its shores, and whether it will impact the chancellors R&D reliefs agenda and decisions on the future of the scheme?