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UK R&D Tax Relief: A Step Change in Compliance Requirements

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The UK’s Research & Development (R&D) regime has been in the news since the start of 2022. The Government has been concerned about both the quantum and quality of claims and has been at pains to reduce the perceived levels of abuse. The March 2023 Budget cast an even bigger spotlight on the R&D tax relief system; not only were we given much more detail on the changes announced in November 2022, but we were also introduced to additional proposals. In April 2023, HMRC provided official guidance explaining how they expect some of the new rules to be applied.

A key part of the new guidance defines the process for making advance notification that a company intends to claim R&D tax relief, alongside a range of mandatory additional information required prior to filing a corporation tax return.

While this new guidance is generally welcomed, the introduction of these new processes gives rise to a drastic increase in compliance work and information recording requirements for both the claimant company and their chosen tax advisors.

Claim Notification

For accounting periods commencing on or after April 1, 2023, many companies who seek to claim R&D tax relief may need to provide HMRC with advanced notification of their intention to make a claim for R&D tax relief. Companies must notify HMRC of their intention to claim if:

  • They are claiming R&D tax relief for the first time
  • They have claimed R&D tax relief for the previous tax year, but submitted the claim after the last date of the claim notification period (6 months after that period of accounts closes)
  • The last R&D tax relief claim submitted by the company was more than 3 years before the last date of the claim notification period

For clarity, the claim notification period runs from the first day of the company’s accounting period to 6 months after the close of that period. If the claimant company has a trading year from January 1, 2024 to December 31, 2024, their claim notification period is January 1, 2024 to June 30, 2025. If the claimant company, or their advisor, is not able to meet this deadline, the company loses the ability to make a claim leading to a potentially significant cash loss to the claimant.

While the majority of the R&D intensive organizations in the UK are aware of the R&D tax relief system and its application, many businesses with legitimate R&D activity may now miss out on valuable support simply by being unaware of these recent changes.

Notifications must be submitted through the Government Gateway by either the claimant company or their chosen advisor and must include:

  • The company’s unique taxpayer reference (UTR)
  • The main senior internal R&D contact in the company who is responsible for the R&D claim
  • The contact details of any agent or advisor involved in the R&D claim
  • The accounting period start and end date for which the company is seeking to make an R&D tax relief claim
  • The period of accounts start and end date
  • A high-level summary of the planned activity and how this meets the standard definition of R&D tax relief

Companies who fail to send a claim notification risk their claim for R&D tax relief being removed by HMRC.

Additional Information Form

Historically, HMRC required no specific information to be provided to justify or support an initial claim for R&D tax relief, and while it was best practice to provide a comprehensive technical report explaining the project work undertaken and the advances that were sought during the period, many companies and advisors did not follow this process. In the event of an enquiry being opened, this written justification would then be produced to justify the claim.

From August 1, 2023, all claimant companies must submit an additional information form to HMRC to support their claim for R&D tax relief, prior to the submission of the company’s corporation tax return. In the event that the additional information form is not submitted in advance of the return, HMRC will remove the R&D tax relief claim from the corporation tax return.

The significant amount of project and financial particulars required by the additional information form constitutes a massive increase in the complex compliance work of companies and their advisors. Additional information forms can be submitted by the company or their chosen advisor through their Government Gateway and must include:

  • The company’s unique taxpayer reference (UTR), employer PAYE reference number, VAT registration number and business type or SIC code
  • The main senior internal R&D contact in the company who is responsible for the R&D claim
  • The contact details of any agent or advisor involved in the R&D claim
  • The accounting period start and end date for which the company is seeking to make an R&D tax relief claim
  • Details of the qualifying expenditure being claimed and aligned to the headings in the associated legislation
  • Details of any qualifying indirect activities undertaken during the period
  • Details of qualifying R&D project activity undertaken during the period
  • A description of what type of relief is being claimed (tax relief or expenditure credit)

When considering the project information, companies claiming:

  • 1 to 3 projects must provide a detailed description of all projects covering 100% of the expenditure being claimed
  • 4 to 10 projects must provide a detailed description of projects that account for at least 50% of the total expenditure and cover at least 3 projects and
  • 11 to 100 projects must provide a detailed description of projects that account for at least 50% of the total expenditure with at least 3 projects described, or if the qualifying expenditure is split across multiple smaller projects, the company should describe the 10 largest

HMRC has provided robust guidance for the information that is required in the project descriptions, further highlighting their expectation for both narrative and financial record keeping for claimant companies.

Companies and advisors can submit additional information forms before 1 August 2023, if they wish. However, HMRC has advised against the preemptive submission of additional information forms as discrepancies between the financial and project information and the corporation tax return are expected to be investigated and will require a considerable time investment on the company’s part.

Closing Thoughts

It is quickly becoming apparent that HMRC is looking to raise the bar when it comes to the type of activity that will allow a company to benefit from making an R&D tax relief claim. They are also looking for companies to professionalize their real-time project and financial record keeping, end of year reporting and general advisory standards. While Frazier & Deeter support the Government’s objectives, many companies with legitimate R&D activity within the UK marketplace could be left out in the cold. It is likely that many businesses may not have maintained sufficient records throughout their R&D work (in one form or another), or their advisors may not be capable of deciphering the complex information provided by their clients and presenting this coherently to HMRC within the required timescales.

Given how many early-stage technology, life science and bio-tech companies rely on their ability to claim significant R&D tax credits, it is concerning that these sweeping reforms have received relatively little press coverage as the delays in retrospectively preparing this information may have a considerable impact on these businesses and their short to medium term funding runways.

Frazier & Deeter will shortly be contacting all of our clients who regularly undertake qualifying R&D work in an effort to provide support in making business changes that will allow all parties to meet the required deadline, avoid claims being lost and provide a more streamline and consistent process submission process.

For more information, please contact:

Please feel free to reach out to our team if you have any queries, or to schedule a free, no obligation call to discuss how these changes may impact you.

Malcolm Joy, Managing Partner | Malcolm.Joy@frazierdeeter.com

Thomas Wells, Senior Manager | Thomas.Wells@frazierdeeter.com

Contributors

Malcom Joy, Managing Partner

Thomas Wells, Senior Manager

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