HMRC are currently reviewing this large figure as ‘tax under consideration’. Which means they need to fully investigate the R&D tax relief claims involved to make sure that they are legitimate.
Who does the HMRC R&D investigation effect?
This involves the top 2,000 UK companies when ranked by turnover. Basically, by mistakenly claiming for R&D tax relief, they have not met their full tax liability to HMRC.
As large companies, they will have made their R&D tax relief claim using the RDEC scheme. This is a great scheme with substantial benefits to encourage companies to invest in innovative projects.
For large companies, the Corporation tax relief works out as a credit calculation that is 11% of your expenditure on R&D projects. This is about 9p for every £1 of your investment.
Patent Box is also an issue
There is also an issue with £90million worth of Patent Box claims. This tax relief allows companies to reduce their Corporation Tax bill from 19% to 10% on profits made specifically through their patents. It can be tricky to be precise about the exact figures just from patent sales, but it’s another great tax relief that’s worth engaging with.
In the 2017-18 tax year, this figure was £78million, an increase of 15%.
Why do these discrepancies exist?
How does £612 million ends up under consideration by HMRC? That’s a lot of investigations for HMRC to work through. And it’s potentially a lot of tax relief that companies may be asked to repay.
R&D tax credits are administered through two different schemes with separate eligibility criteria. The basic division is the size of the business. The RDEC scheme is used by larger businesses and R&D Tax Credits are for SMEs. It’s an amazing tax saving for companies, worth a total of £4.3bn.
There are two main reasons for the current flaw in the system.
- Difficulties with R&D tax relief submissions
One is the complexity of the regulations. Conversely, this has long been cited as the main reason why so few businesses claim the tax relief. The rules are detailed, involve many proportionate figures and are open to misunderstanding.
Not only do businesses have to identify if their project is eligible, they then have to identify exactly what costs they can include. The fact that the R&D tax relief schemes can be used by any industry means that the rules will be complicated. Because they have to account for every possible scenario. It’s easy to see how companies accidentally claim more than their actual entitlement.
No one wants to see a narrowing of the schemes, just a simplification in the application process.
And there are always the few who attempt to scam the system. HMRC will always have to be ready to investigate those that are defrauding the government through deliberate misuse of tax relief opportunities.
- Unscrupulous advisors
As the system is complex and the penalties for incorrect submissions are high, seeking expert help is a wise option. Unfortunately, this is an opportunity for the unscrupulous or unqualified to deliver incorrect advice for their own benefit.
A rise in the number of companies claiming to be R&D tax relief specialists is another major cause for concern, as HMRC set about rectifying the situation. If companies are relying on outside agencies to secure their R&D tax relief, they really need to be doing their background checks. No matter who you have entrusted to submit your claim, the responsibility for any fallout lies squarely on your shoulders.
HMRC really want companies to make use of the R&D tax relief schemes and reinvest their money into future innovative projects. It’s great for the individual businesses and collective economic growth. But they must chase companies that have made inaccurate claims and punish those that have done so deliberately. Otherwise the overall tax takings are skewed unfairly, to the tune of £612million.
