Research and Development tax relief has become one of the UK’s most successful tax advantaged incentives for companies. Government figures place the total number of R&D tax credit claims for the year ended March 2020 at 85,900, an increase of 16% from the previous year. In financial terms, the estimated total amount of R&D tax relief support claimed for the year ending March 2020 was £7.4 billion, an increase of 19% from the previous year. This corresponds to £47.5 billion of R&D expenditure, 15% higher than the previous year.
Recent Budgets have attracted speculation that the R&D tax credits scheme would be axed, and whilst this has not happened, the R&D landscape has changed significantly this year. Guidance to the legislation was published in December 2021 by HMRC who have described this guidance as ‘clarification’ of what they believe the legislation means. They expect the new R&D tax credits guidance to be followed for every claim submitted after December 2021, and this has implications for companies claiming under the SME R&D legislation.
Two R&D tax credit schemes
By way of background, there are two R&D schemes – the SME scheme and the large company scheme ‘RDEC’. The SME scheme is significantly more generous than RDEC. It is also much more widely used. For the year ended March 2020, 76,225 of the total claims made were SME R&D claims; a 16% increase on the previous year.
There are circumstances in which specific projects carried out by an SME do not qualify for relief under the SME scheme, despite the company itself qualifying. Instead, the tax relief for these projects needs to be claimed under RDEC. HMRC’s revised guidance has now extended those circumstances to cover more scenarios.
How has the R&D tax credits scheme changed?
Specifically, HMRC is concerned with cases in which the claimant company could be seen to be subcontracted to carry out work for another entity and/ or is subsidised for that work. If either is the case for any project, relief cannot be claimed under the SME scheme, but it can be claimed under RDEC.
Changes to HMRC guidance for SME R&D tax credits scheme
- HMRC would previously have accepted the claimant company is not subcontracted unless there is a specific subcontract agreement in place. This has now been significantly extended;
- HMRC would only have treated a project as subsidised if a grant had been received specifically for that project. Now they are taking the view that a project is subsidised if payment has been received from the client.
These changes effectively mean that now, any projects undertaken on request from a client are to be treated as contracted, and any payment received for a project from the client is to be treated as a subsidy.
The result is that relief for such projects can only be claimed under RDEC, and not under the SME scheme as previously.
The guidance has created a lot of unrest within the tax industry and uncertainty for their clients as many SMEs depend on R&D tax credits to finance new developments. We are hopeful that a tribunal case will be brought to clarify whether the guidance is in fact what the legislation intends.
