The merged R&D expenditure credit applies to accounting periods beginning on or after 1 April 2024. A lot has been written about these reforms to the R&D tax relief schemes, and no doubt you are familiar with the different rules, rates, and requirements. But taken together, in this climate of increased HMRC scrutiny, we are starting to see some of the day-to-day resource implications for our clients.
New PAYE requirement for the AIF under the new merged scheme
HMRC is asking for more information as part of the AIF, including information that you won’t have been asked to detail in a claim before. The most obvious example ofc this is that a claimant will need to document the PAYE number for each of their Externally Provided Workers (EPWs) whose costs are being claimed as part of an eligible R&D project. It’s something that your R&D advisor or accountant won’t be able to do for you, and you may need to reach out to subcontractors or third parties for this information.
New skills and commercial expertise to review contractual evidence
The situation around contracting out R&D has become more complex and requires more evidence, documentation, and interpretation from R&D experts. Details of your subcontracting arrangements should be reviewed in order to interpret the commercial arrangements and ensure that HMRC’s requirements of R&D being “intended and contemplated” are met.
This means that you need to provide these contracts to your R&D advisor, or, even better, you can liaise with your R&D provider ahead of the creation of those contracts to ensure that they are drafted in a way that satisfies HMRC’s requirements.
Connected company arrangements required under Enhanced R&D Intensive Support (ERIS)
Another new requirement is to provide specific connected company details if you intend to claim R&D tax relief under ERIS. This includes details of the R&D expenditure of any connected company, whether this is forming part of the claim or not. The trading and operating expenses will need to be declared for each connecting company, as well as the adjustment figure for capitalised R&D expenditure.
The enhanced rate is valuable to loss-making SMEs, but that reward comes with a burden of proof that your claim satisfies the ERIS requirements.
What does this mean for our clients?
This inevitably means more admin will fall to you as you collect and collate the required information. This may include reaching out and gathering the relevant details from external parties, all of which need to be factored into the timelines and deadlines of a claim. There is a case for building processes and procedures with the help of your R&D provider, so the relevant documentation is identified and collected in real time.
To an extent, the smooth running of this process relies on the skills and experience of your R&D provider, and we aim to reduce the admin burden as much as possible.
What if I don’t provide this information on my AIF?
There is an option not to provide this additional information on AIF, but here at Source Advisors, we take the view that this could be considered a risk factor to HMRC and could trigger further investigation.
If your current R&D advisor isn’t asking for this information, it could be that they aren’t across the detail, or maybe they think there is a chance that they will get away without providing this information. This feels like a risky strategy to us. Any effort saved in not providing this information now could be massively outweighed by the resource and time needed to mount a defence to an HMRC enquiry further down the line.
