Targeting abuse of the R&D tax relief SME scheme by Sarah Scala, Head of the Tax Dispute Resolution Team at Claritas Tax and Caroline Walton, Head of the Innovation Reliefs Team at Claritas Tax

Caroline Walton and Sarah Scala offer a reminder of the background to the Research and Development tax relief and explain the concerns HMRC has about abuse of the relief

Tax reliefs are a key feature of the UK corporate tax system. Research and Development (R&D) tax relief supports companies that work on innovative projects in science and technology. It can be claimed by companies that seek to create a scientific or technological advance in their field, in new or improved products, processes, materials, services, devices or knowledge.

The relief for small and medium-sized enterprises (SMEs) is valuable and allows a company to deduct 130% of its qualifying R&D costs from its annual taxable profit, as well as the normal 100% deduction, to make a total 230% deduction. In the case of a company that has paid or is liable to pay corporation tax, the financial reward is repayment of corporation tax or a reduction in corporation tax due. In the case of a company that is not liable to pay corporation tax because it has no taxable profit, the benefit will be new or increased losses. These can be surrendered in return for a tax credit worth up to 14.5% of the surrenderable loss or carried back/forward and set off against profits in previous/future accounting periods.

Since the SME scheme was launched in the year 2000, over 300,000 R&D tax credit claims have been made and the number of companies claiming is increasing each year. According to HMRC statistics (published September 2021 and updated on 26 April 2022), the estimated total number of R&D tax credit claims for the year ended March 2020 is 85,900, an increase of 16% from the previous year. The increase is attributed to the 16% rise in the number of SME R&D claims to 76,225.

The increase in the number of claims has resulted in HMRC having difficulty in tackling errors and fraud associated with the reliefs. According to HM Treasury’s publication titled ‘R&D Tax Reliefs Report’, published in November 2021 in response to the Government consultation that ran between 3 March 2021 and 2 June 2021, concern over abuse and boundary-pushing involving the R&D tax reliefs has grown in recent years.

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