If you had asked me about R&D tax credits two or three years ago, there would have been plenty to talk about.
The market was in turmoil. We had repeated rule changes, increasing levels of HMRC scrutiny, changes to relief rates, and, ultimately, the introduction of the merged R&D scheme. At the same time, there were far too many poor advisers in the market encouraging claims that, in my view, should never have been made.
It has been quite a painful few years.
But perhaps the most interesting thing I can say about R&D tax relief at the moment is that it finally seems to be settling down. For the last six months to a year, it has started to feel much more like normal professional work again. And after three or four years of constant change, I think that is a very good thing.
The R&D market needed to change
There is no point pretending there wasn’t a problem with the R&D tax relief market.
A few years ago, there were advisers making claims for businesses that really should not have been claiming. That was never how we approached it at Edwards. The businesses we work with are genuine science and tech companies undertaking R&D.
The changes introduced by HMRC and the increase in enquiries made life more difficult for everyone to some extent. However, they have also led many of the poorer advisers to leave the market and I think that has been good for the scheme.
What we are left with is much closer to how professional tax advice should operate. Businesses undertaking genuine R&D make properly supported claims, those claims are scrutinised where appropriate, and advisers have to be able to stand behind the work they submit.
The bar is higher than it was. Claims also generally involve more work to prepare and justify properly. But our experience is that genuine claims are still going through. The vast majority of our established R&D clients continue to receive the relief they expect and, broadly, within the sort of timescales we were seeing previously.
The message I would give science and technology companies is quite simple: R&D tax relief is still very much open, but you’ve got to submit genuine claims properly.
R&D tax credits are certainly not dead
I’ve heard people say that R&D tax credits are dead, but that’s simply not true. These sorts of comments, along with the changes and publicity surrounding HMRC enquiries, mean that some businesses have become understandably cautious.
However, we continue to work on a significant number of claims every month for science and technology companies, and genuine claimants are still receiving the benefit.
That matters because, for many early-stage science businesses, R&D tax relief isn’t simply a nice addition to the year-end numbers. It can be a vital part of their funding model.
Many of the scientists and technology entrepreneurs we work with develop something for several years before they can generate meaningful commercial revenue. They employ highly skilled people, operate laboratories, develop software, conduct testing, and continue investing as their technology evolves. They therefore factor expected R&D tax relief into their cash flow projections.
If R&D tax relief were to suddenly disappear, the impact on that part of the UK economy would be enormous. I haven’t heard anything to suggest that is going to happen, and successive governments have continued to talk about supporting science, technology and innovation. But it demonstrates why stability in the scheme matters.
The overseas R&D rules are where I still have concerns
If there is one part of the current rules that I think deserves more discussion, it is the treatment of R&D undertaken overseas.
I understand what the Government is trying to achieve.
Take a relatively straightforward software business. Historically, a UK business might have decided to use developers in another country simply because they were considerably cheaper than developers in the UK.
I can understand that UK taxpayers should not necessarily subsidise a decision made purely to access cheaper labour overseas. But genuinely world-class science and technology isn’t always that straightforward.
Some of the best R&D is collaborative across the globe.
A science business may be assembling a world-class team containing experts from several different countries. It might need access to a specialist facility that only exists in America or elsewhere in Europe. The best person, technology, testing environment, or research infrastructure for a particular part of a project does not necessarily sit in the UK.
That is simply how international science works.
The current rules generally restrict relief for overseas contractor costs and externally provided workers. However, an exception can apply where conditions necessary for the R&D are not present in the UK, but are present where the overseas activity takes place, and it would be wholly unreasonable to replicate those conditions in the UK.
Importantly, cost and the availability of workers by themselves are not qualifying reasons and this is where the detail really matters.
If a business simply says, “we used somebody overseas because they were a third of the price”, that is very different from saying, “this part of our research genuinely required access to conditions or a specialist facility that could not reasonably be replicated here.”
There are also inevitably situations that sit somewhere between those two extremes, so the rules can be complex. HMRC have issued guidance and examples, but these can sometimes be difficult to understand. It will be interesting to see how HMRC apply these rules going forward. However, we have had successful claims go through where conditions necessary for the R&D to take place genuinely don’t exist in the UK
International collaboration should not automatically be a dead end
My concern is that we shouldn’t create a system that discourages genuine UK innovation from accessing tax relief simply because the expertise and facilities it needs are outside the UK.
We have already dealt with claims involving overseas activity under the newer rules and those claims have been successful. But this is a relatively new area. Every case needs to be considered on its own facts and businesses need to be able to explain and evidence why particular R&D activities needed to take place outside the UK.
Advisers need to take the approach that they need to understand the science, understand how the project has been structured and then work through the rules properly.
Why timing matters for AI and software claims
Advance notification lets HMRC know that you intend to make an R&D claim, but the actual claim may follow much later, with businesses generally having up to two years after their financial year ends to submit it.
However, with AI and software advances moving so quickly, waiting that long to make a claim can make the claim harder to justify. What was a real technical advance when you developed it may seem fairly standard two years later.
HMRC are encouraging companies to submit their claims earlier following advance notice. Our advice has always been never to leave your claim until the last minute. Claiming sooner helps you explain the challenges you faced and what you achieved while the details are still fresh and before other advances have caught up.
My request for the next Budget? Give us some stability
We now have another new Prime Minister and another Budget approaching. Andy Burnham’s Government is due to deliver its first Budget on 28 October, so inevitably businesses will start wondering what might change.
At the moment, I haven’t heard anything specific suggesting another major change to R&D tax relief, and personally, I hope there isn’t one.
HMRC has also introduced a targeted advance assurance pilot for eligible SMEs, allowing companies to seek assurance on particular complex or higher risk areas of a future claim. It is still far too early to judge how successful that will be, but anything that can provide genuine innovators with greater certainty is worth watching.
We’ve had three or four years of change, and businesses and advisers have had time to get used to the new framework. What the market could really benefit from now is a period where the Government simply lets the system settle.
Genuine companies are claiming. HMRC has a more robust regime. Many of the advisers who caused problems have gone. Businesses are starting to understand where they stand again.
So, my message ahead of the Budget would be fairly simple: Give the science and technology sector some stability.
And for businesses themselves, don’t assume R&D tax relief has disappeared simply because the rules have become more demanding.
If you are carrying out genuine R&D, there may still be significant support available. You just need to make sure you claim it properly.
Talk to Edwards about your R&D tax relief claim
If your science or technology business is carrying out genuine R&D, then R&D tax credits are still very much available, but the rules are more demanding, and claims need to be prepared properly.
This is particularly important if your projects involve overseas specialists, international collaboration or access to facilities outside the UK, where the position can be more complex.
At Edwards, we work with science and tech businesses at every stage of growth and prepare R&D tax relief claims that are robust, well supported and based on a clear understanding of the work being undertaken.
If you are unsure whether your activities qualify, are concerned about changes to the rules, or want a second opinion on how your current claim is being handled, contact our team to talk it through.
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