UK R&D tax credit – a valuable source of funding

For many years, the UK’s Research & Development (R&D) tax relief schemes have been a valuable source of funding to help companies reinvest in innovation. But with generosity comes risk - and HMRC has grown increasingly concerned about fraud and error in the system.

The scale of the problem became starkly clear when HMRC estimated that in 2020-21, around £1.13 billion - 16.7% of the value of all R&D claims - were incorrect. Most of these irregularities were linked to the SME scheme, where smaller businesses were seen as more vulnerable to poor-quality advice or, in some cases, deliberate abuse.

Against that backdrop, HMRC has acted decisively to tighten its compliance activity. Over the past two years it has significantly ramped up its scrutiny of claims and the days of “rubber stamp” approvals are long gone. Companies now face increased compliance checks, with more challenges to claims from HMRC and requests for detailed supporting evidence.

At the same time, the design of the schemes has been reformed. Rates were reduced for SMEs while being increased under the large-company RDEC scheme, ahead of the move to a single merged RDEC-style framework.

New pre-notification rules require first-time claimants, and for some who have previously claimed only via amended returns, to register their intent to claim, before submitting. This has caught out many businesses unaware of the change, meaning some claims have been rejected.

Additional reporting obligations now require technical and financial details to be submitted into HMRC’s R&D tax credit “portal” and HMRC has written directly to companies in sectors it considers “high risk” – including hairdressers, beauty salons, hospitality and care homes – to clarify what does, and does not, qualify as R&D.

R&D claims in Northern Ireland

The picture in Northern Ireland underlines both the challenge and the opportunity. According to the latest HMRC R&D statistics, analysed by KPMG, businesses here have continued to invest in innovation despite economic pressures and tighter compliance rules.

To March 2024, Northern Ireland companies made 1,305 claims worth £140 million in tax credits. While that is a reduction from the 1,670 claims and £155 million seen in the year to March 2023, the region actually increased its share of claims nationally, from 2.6% to 2.8%.

This points to resilience and a determination among local firms to maintain an innovative edge, even in a more demanding environment. The reduction in what are mostly smaller claims, may also indicate that companies in Northern Ireland, like other areas across the UK, were susceptible to making incorrect claims in the past.

In this new climate, expertise and credibility matter more than ever, which is one of the reasons why HMRC now ask claimant companies to name their R&D Tax Credit advisor when submitting their claims.

HMRC is clamping down hard on fraudulent or poorly prepared claims, and only high-quality, evidence-based submissions will succeed. For those willing to approach the process diligently, the R&D tax credit remains a valuable source of funding to fuel future innovation.

This article first appeared in Ulster Business Magazine and is reproduced with their permission.