At the start of July, HMRC published its annual reports, including some detailed, albeit provisional, figures regarding R&D tax relief. As expected, HMRC projected fewer businesses benefiting from R&D tax relief, with a slight (4.8%) uptick in claim values. There is greater confidence that the schemes are being administered correctly whilst reducing fraud and error. HMRC projects an enquiry rate of 5.3% overall, but scratch beneath the surface and the enquiry rate is double that (11%) for those claiming Enhanced R&D Intensive Support (ERIS).
Why are R&D intensive businesses more likely to get into HMRC enquiry?
Looking at our own experience of supporting clients in enquiry and speaking with R&D-intensive businesses, their accountants and investors, we fear that the actual rate of enquiry for early-stage, seed through to B round businesses could be significantly greater than 11% that HMRC suggests.
There are a few reasons why I think they will continue to face greater scrutiny:
- The lure of a cash benefit – the abuse of the old schemes often came down to the ability to extract cash vs a paper deduction. The continued appeal of ‘free cash’ will, sadly, tempt some to try their luck.
- HMRC simply doesn’t understand it – the R&D in these businesses isn’t commonplace and the concepts are unlikely to be relatable technology. Naturally, HMRC want the opportunity to improve their understanding. However, this education comes at a cost to businesses in disruption and resource when they will almost certainly be time-poor.
- Quality of reports – tax won’t be top of the priority list for these businesses. For them it’s all about innovation and how to commercialise it. Often the record keeping and project structures don’t align to the rigid approach HMRC expects, and with that comes a likely challenge.
How should venture stage businesses plan for R&D tax relief?
Instead of thinking of R&D tax relief as a “tax thing”, think about it as part of any future due diligence from investors. Each round changes and the deeper you get, the more rigorous financial due diligence you face. So rather than seeing R&D tax relief through the lens of a nice tax benefit, a change of mindset views it as essential to support an optimised valuation.
Ideally there will be some level of detailed project methodology, but when that’s unrealistic, record-keeping is non-negotiable. Recording invoices and order forms to evidence input into the R&D project can help an advisor piece together the timeline and demonstrate the method of a project.
And of course I believe a good advisor can be worth their weight in gold, which will come as no surprise, but no less true for that. Bootstrapping is needed but not at the cost of progress. Having people along the journey with you that allows for laser focus on the goal with minimal distraction will pay back. We often see businesses at this stage do claim reports themselves, even with an accountant or advisor on board, and the translation gap between founders and HMRC could not be wider.
Reasons for optimism
What is very welcome news is the tone has now shifted back to a positive, growth-focused sentiment around R&D tax relief and the vital role it can play in supporting innovation. HMRC has developed better approaches and the removal of the “one -o-many” enquiry campaign approach is very welcome. We now know with clarity what the expectations are, and how best to navigate them. Source Advisors can support your business through an HMRC enquiry, whether you are an existing client or not. Contact us to find out more.
