R&D Tax Credit Reforms Raise Concerns For Business Owners In The UK

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UK (Parliament Politic Magazine) – Will construction companies miss out on valuable incentives designed to encourage innovation under a shake-up of the research and development (R&D) tax credits scheme? Her Majesty’s Revenue and Customs (HMRC) states its determination to crack down on abuses of the system. Still, some tax specialists express concerns that an imminent tightening of the rules might discourage valid claims.

The principle of R&D tax credits is straightforward. Initially introduced by the then Labour government in 2000, the concept aims to utilize the tax system to incentivize investment in R&D, which has the potential to drive innovation and foster growth. Essentially, companies can claim a refund of a portion of their R&D costs, typically through a reduced corporation tax bill.

HMRC Has Announced A Series Of Changes

In recent years, there has been a growing concern regarding certain companies attempting to exploit loopholes in order to obtain tax credits they are not entitled to, or worse, engaging in outright fraudulent activities. According to the government’s official estimate, released in July, these abuses have cost the Treasury a staggering £1.13bn in the 2020-21 financial year alone.

In response to these long-standing concerns, HMRC has introduced a series of changes aimed at strengthening the system. Starting from 1 August, all tax credit claims must be submitted digitally through an HMRC portal and must be signed by a named director of the applying company. 

Additionally, companies that have not previously made a claim will be required to notify HMRC in advance of their intention to do so. Furthermore, the scope of the scheme will be limited to R&D activities conducted within the UK. Consequently, UK businesses pursuing R&D in overseas markets will no longer be eligible to claim tax credits for such endeavors.

Scope Of Scheme Is Expected To Be Tweaked

The scope of the scheme is being adjusted to accommodate emerging technologies. This means that firms will now have the opportunity to include the cost of data analytics and cloud computing in their claims. However, there are concerns among experts that the increased bureaucracy and the fear of being investigated may discourage companies from making claims. To address this, HMRC has hired 100 additional inspectors to audit R&D tax-credit cases.

Richard Clutterbuck, a tax specialist at The Guild, a freelance-engagement specialist that advises the National Federation of Builders, believes that the changes will have both positive and negative implications for construction companies. On one hand, the reforms will introduce more administrative work as the process of making claims is changing and more information will need to be provided. On the other hand, the expansion of eligible tax credits will benefit construction companies that are forward-thinking and technologically savvy, particularly those that utilize datasets and cloud computing. The scope of scheme seems promising as it can benefit a lot of small and large scale businesses. 

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The Institute of Chartered Accountants in England and Wales Show Their Concerns

The Institute of Chartered Accountants in England and Wales (ICAEW) shares concerns regarding the proposed changes in pre-notification and non-UK claim regulations. According to a spokesperson, the ICAEW believes that these measures will not effectively reduce the number of invalid claims. Instead, they will impose additional administrative burdens and limit the relief available to genuine claimants.

This situation is particularly worrisome in the construction industry, where it is suspected that many companies are already not fully utilizing their R&D tax credits. Despite accounting for 9% of the UK’s economy, construction businesses received only 6% (£6.6bn) of the total tax credits paid out in the most recent year for which data is available (2020/21), as reported by HMRC statistics.

Many businesses recognize the value of the scheme and are reaping substantial benefits from it. A prime illustration of this is evident in the recently published annual results of Laing O’Rourke. 

The report reveals that the company invested £33 million in research and development during the 12 months leading up to March 31, 2022, resulting in a commendable £4.7 million in tax credits. However, it is worth noting that some firms have been slower in embracing this opportunity.

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.