Can UK Tech still rely on the R&D Tax Relief Scheme?

The UK’s Research and development (R&D) tax relief scheme has long been a vital resource for tech companies, offering substantial tax relief. Created to encourage investment in R&D, the scheme allows small companies to claim back a percentage of their expenditure on qualifying activities. However, the recent crackdown on fraudulent claims, tightening of the claims procedure and additional scrutiny on all claims is raising questions about the effectiveness of the scheme, leading to growing frustration in the tech sector and many to question if it’s becoming more trouble than it’s worth.

Fraud and abuse: a growing concern & increased scrutiny

The scheme has been plagued by issues of fraud and abuse. According to a recent BBC article Errors and Fraud have cost the taxpayer ￡4.1bn , and another recent article from Dan Neidle at Tax Policy Associates, states R&D Tax Specialist Green Jellyfish are guilty of ￡100m fraudulent claims alone .?

The has led HMRC to ramp up its efforts to detect and prevent false claims. They tightened their claims procedure in 2023 and have hired an additional 300 inspectors since 2022 .

Within my network at least, it's clear this is having an impact, with many reporting a significant increase in their claims being questioned, delayed and rejected.?It's caught a lot of organisations on the back foot.

While the crackdown is undoubtedly necessary, it's also exposed the complexity of the scheme and the subjective nature of the scheme’s requirements, and the increased scrutiny has made it more difficult for companies to navigate the claims process.

The issues with the scheme: complexity and subjectivity

One of the significant issues with the R&D tax relief scheme is the subjective nature of its requirements.

According to the UK Government's R&D tax relief guidelines , to make a successful claim, a company must demonstrate that their project:

• Looked for an advance in the field.
• Had to overcome scientific or technological uncertainty.
• Tried to overcome this uncertainty.
• Could not be easily worked out by a professional in the field.

What constitutes an "advance in the field"? How significant must the "scientific or technological uncertainty" be? Who qualifies as a "professional in the field"? How hard does something need to be to say it couldn't be "easily worked out"?

Ah but helpfully, HMRC do have more detailed guidance. Behold CIRD81910, and CIRD81960 for further guidance for software. A quick glance at these documents reveals that they are highly technical and not particularly user-friendly (it appears none of Government Digital Service 's skilled content designers had a hand in drafting this guidance).

Even with these guidelines, the answer to whether a project qualifies is frequently (as is oft' the case when you ask a software developer a question), "it depends." The CIRD81960 guidance for software itself acknowledges these difficulties, and I could write a whole article on the cases for and against the eligibility of software development to be considered R&D, ranging from most of it to very little.

This complexity and subjectivity poses a key risk: differing interpretations between HMRC inspectors, potentially resulting in legitimate claims being unfairly rejected.

Increased burden on companies

Previously, companies could rely heavily on R&D claims specialists to handle much of the work involved in submitting claims. However, with the heightened scrutiny now applied to nearly all submissions, companies are needing to provide far more detailed descriptions of their R&D activities.

While R&D claims specialists can assist with navigating the claims process, they typically lack technical experience and certainly lack the knowledge needed needed to accurately identify which aspects of your software development involve genuine technical uncertainty.

This burden is increasingly falling on the tech teams within organisations, who must now invest significantly more effort into their claims, often resulting in weeks of back-and-forth between technical staff and supporting R&D claims specialists.

Nervously awaiting legal precedents

As many organisations that previously relied on R&D tax relief are finding their claims rejected, it's pushed some into financial difficulties. Consequently, more are being challenged in court, and these cases are likely to set precedents that will shape future interpretations of what qualifies as R&D.

In the meantime, many other organisations are anxiously awaiting the results of their first claims submitted since rules changed in 2023 and all the new inspectors came on board.

The outcome of these court cases and recent claims could have significant implications, not just for the companies involved but for the entire UK tech sector.

(By the way, previous successful claims are not home and free, HMRC can go back and review claims up to 4 years old and there are recent examples of where organisations have received tax relief and then been asked to give it back ).

The need for a rethink

While improving and simplifying the guidance might offer some benefit, the real solution may lie in a complete overhaul of the scheme. Tax incentives that support the creation and growth of innovative new businesses are undoubtedly valuable, but it’s becoming increasingly apparent that this particular scheme may no longer be fit for purpose.

There are certainly at least, questions to ask about the the feasibility of the scheme, given the growing cost and effort required for HMRC to manage it effectively and prevent fraud, the increased burden on organisations to submit detailed claims, and the rising uncertainty over whether those claims will be accepted.

An incentive you can’t rely on?

Despite HMRC’s claim of "making R&D easier for small companies," recent developments have made the scheme far more difficult to navigate.

With increased scrutiny, a much greater burden for making claims and greater uncertainty as to whether claims will be accepted, many tech companies are finding it increasingly difficult to benefit from the scheme.

If tech companies can no longer rely on the R&D relief scheme, it ceases to be an incentive.