The September 2020 Research and Development Tax Credit Statistics have just been released. There is a lot of data which can be reviewed here but HMRC have listed what the feel are key points on page 3 of the main report (see link below).
Rather than rehashing these, we would like to put forward what we think are the main points of interest.
In the 2017/18 year, 13,950 claims were submitted by the Information and Communication sector. The deadline for submitting claims for the 2018/19 year has not yet been reached however, almost as many claims have already been submitted as for the entire previous period which is surprising. Prior to 2019, there was a lot of confusion in general about what constitutes a software R&D claim but HMRC released guidance at the end of 2018 which really clarified what would be acceptable as a qualify activity in this area. This really narrowed the scope of qualifying activities and should have led to a decrease in software related R&D claims. This doesn’t appear to have been the case.
The number of R&D claims being submitted is on the rise. HMRC feel that this is due to changes to the schemes such as increases in the uplift rate making the schemes more attractive. We would disagree with this statement and suggest that the number of claims increasing is due in large part to companies making claims regardless of eligibility and many of those claims which do not qualify going unnoticed as HMRC don’t check all claims submitted.
We would also disagree with HMRC’s statement that the statistics ‘represent expenditure in the UK which qualifies for R&D tax relief and has been used to make a claim’. It may represent expenditure which has been used to make a claim but, as mentioned above, that does not mean the claim necessarily qualifies.
It has been suggested that HMRC only have time to check 20% of claims and these tend to be the higher value ones. So far in the 2018/19 period 23,580 ‘minimal’ value (<15k) claims have been processed and it is unlikely that many of these have been checked. This equates to £145million of benefit being released to potentially non-qualifying companies.
A Business Enterprise Research and Development (BERD) survey estimates UK R&D expenditure to be approximately a third less than R&D tax relief stats show. This mismatch can in some part be explained by the fact that R&D tax relief figures take into account some non-UK expenditure whereas BERD doesn’t but this in no way completely accounts for the £12billion difference – further evidence to suggest that there is a discrepancy between ‘processed’ R&D claims and ‘adequately qualified and approved’ R&D claims.
The above may make for depressing reading and there is without question an issue with adequate R&D tax relief understanding and advice in the UK. However, there is no doubt that HMRC work extremely hard to defend against fraudulent R&D claims whilst keeping processing timelines within agreed parameters -measures announced in the 2018 Autumn Budget were a direct response to HMRC’s identification and prevention of £300million of fraudulent claims. In addition, changes to HMRC’s processing systems over the last couple of years have had a definite positive impact.
If you have any thoughts on the above or would like further details, we would love to hear from you.
The full report and supporting data can be found here: