New R&D Tax Credit guidance changes the game for claimants

HMRC has shaken up the R&D Tax Credit filing process by introducing new guidelines for claimants to follow.

The new guidance introduces a lot of non-statutory expectations and recommendations for preparing R&D claims, and in turn this gives HMRC a whole raft of new reasons on why they could decline to accept an R&D claim – on the basis of “insufficient information”.

However, if the new guidance can be followed, it gives R&D claimants an opportunity to protect themselves and make it much harder for HRMC to reject a claim – provided they have followed the new guidance.

HMRC now wants claimants to create a lot of documentation and information about their R&D claim that wasn’t previously a formal requirement. They recommend much of this should be created at the outset of the R&D project rather than retrospectively when the claim is prepared.

The new Guidelines for Compliance (GfC)

On 31 October 2023, HMRC published detailed new “Guidelines for Compliance” (GfC) which seek to clarify what has recently become a very uncertain process for companies claiming R&D Tax Credits.

The new guidelines can be viewed here .

Do the new guidelines replace the old Guidelines?

HMRC points out that the new GfC do not replace either the existing 2004 or the updated 2023 BIS Guidelines provided by the Department for Science, Innovation and Technology (DSIT) and that claimants should continue to refer to these when preparing an R&D claim.

Despite this, a question mark remains over whether HMRC is trying to effectively supplant the 2004 Guidelines as the GfC reproduce some parts of the Guidelines but omits others.

In practice, are HMRC caseworkers going to refer to the new GfC and stop looking at the original Guidelines?? Furthermore, do we need two largely parallel sets of guidance along with the CIRD manual and the notes for SME claimants?

Crucially, the new GfC are strictly outward-facing in terms of what they expect from claimants, but fails to address many of the significant, internal misunderstandings amongst their new compliance staff such as what is meant by “materially affecting the underlying technology”, or “the company’s own knowledge or capability”, or whether you need to apply new methods of development in order to achieve your advance.

That means that claimants who are confronted by staff who do not understand the Guidelines still have no obvious port of call to achieve a quick correction of approach.

What is HMRC aiming to achieve through the new guidelines?

The enormous growth in the number of R&D claims being filed in recent years has been accompanied by a significant increase in suspected levels of fraud and error, which HRMC estimates now costs the Treasury ￡1.13 billion .

While this estimate is questionable, and based on a dubious methodology , where incorrectly refused claims are treated as non-compliant without further scrutiny, there is no doubt that there has been a significant growth in ineligible claims over recent years.

This is at least partially due to the fact that, prior to August 2023, R&D claims could be filed without providing any written substantiation that R&D had taken place. This was compounded by the fact that HMRC only examined a small number of claims in any detail.

Whilst the 2004 Guidelines set out the actual legal requirements for making an R&D claim, and HMRC had recommended that claimants maintain records, there has never been any specific documentary evidence required to accompany a claim.?

This led to a number of rogue advisory firms springing up, which, along with many accountancy practices with scant understanding of R&D, took full advantage of the light-touch approach to claiming R&D Tax Credits by filing claims for activity that wasn’t qualifying R&D.

As the scale of R&D Tax Credit fraud and error became apparent, HMRC began to realise that it needed to be clearer with regard to what it expected of claimants. The introduction of the mandatory Additional Information Form (AIF) to accompany all claims from 8 August 2023 was a first step towards this, and the new Guidelines for Compliance go further in terms setting out additional requirements for identifying and recording R&D activities.

The good news is that R&D advisors and their clients now have a much clearer understanding of HMRC’s approach in terms of:

• The activity that can be claimed as R&D
• How to document the advance planning of an R&D project
• Defining a Competent Professional , and considering their role

This new guidance does however highlight the continued effort by HMRC to shift the focus away from a project seeking an advance towards a project seeking to resolve an uncertainty, and with a further requirement that each specific uncertainty be detailed exactly with a separate plan for resolving each one.

I?think that this reflects a desire by HMRC to limit the R&D on a larger project to a lesser amount of R&D on smaller technically uncertain subprojects. (It should be noted that is not supported by the 2004 or 2023 Guidelines).

There is also a new emphasis on documenting advance planning of the project. There is no requirement in the Guidelines for a written plan, and many smaller companies will proceed without one, but it would seem to make the agreement of a claim easier so it is certainly worth doing.

Even without a written plan, the requirements to substantiate a project do mean that an advance needs to be being sought, and that the work to do so is conducted systematically, so some sort of plan is obviously needed.

However, the specifics detailed by HMRC fail to understand that from the company point of view it is the commercial project which is the end result and which will be properly documented. The R&D may only be a part of that so, for the first time, HMRC seems to be requiring that the R&D project be considered and documented as a separate activity from the overall project. This represents a considerable shift in emphasis.

Does it make handling an HMRC enquiry easier?

This new guidance could be particularly helpful in the event that HMRC opens a Compliance Check into a claim.

If the R&D is documented in a way that meets the new GfC then HMRC will have less grounds to refuse a claim.

If the new requirements have not been met, then it they may be quite likely to refuse a claim on the basis that the GfC have not been followed, and so there is insufficient evidence to support the claim.

What about the impact on R&D advisors?

With the head of HMRC, Jim Harra, publicly saying that R&D Tax Credits are a “honeypot ” for rogue agents, it is clear that there will be no slackening of HMRC’s compliance activity.

I have written extensively about the aggressive sales and marketing tactics of some R&D advisors who target companies that haven’t yet made an R&D claim. These R&D firms use cold-calling or social media campaigns to encourage companies to file R&D claims even though they had no idea they were doing R&D until they were told by the advisor.?

The type of marketing case study beloved of certain R&D advisors (“I actually didn’t think we’d have a claim, I still can’t believe it!" ) has clearly alerted HMRC to the promoter-type activities promulgated by sections of the R&D advisory market.

In order to address this problem, some limitations had already been put on the ability to claim retrospectively with a new requirement that companies must inform HMRC in advance of their intention to claim make an R&D claim.?

The new GfC take this a step further with a new emphasis by HMRC on the desirability of documentary evidence of planning, to establish that there is an R&D project underway, and when it began, which will focus attention on what was in place at outset.

To meet this need will require a shift in focus from retrospective claim preparation toward work done at the start of the R&D project to ensure it is understood and documented properly.?

This could spell the end of the road for the opportunistic, promoter-type R&D Tax Credit advisor as these firms will likely find the retrospective nature of their business model is no longer viable.

For the more quality-focused and technically capable R&D advisor, the GfC provide a clear opportunity for differentiation in what was crowded market where every advisor was claiming the same capabilities as each other. The need to expertly understand R&D projects and to provide convincing documentation has increased so it is only a matter of time before less experienced advisors fall by the wayside.

How will the new Guidelines impact on claimants?

The good news is that anyone who follows the GfC can insulate themselves from the risk of a prolonged HMRC enquiry resulting in the disallowance of their claim.

This new guidance puts a Competent Professional clearly in the frame and it effectively tells claimants that if they’ve followed the proper guidance then it’s very likely that their claim will be accepted, particularly if they’ve cited a legitimate Competent Professional.

If claimants are able to go through the steps outlined by HMRC (although some of them may prove impracticable at least at the level of detail suggested) then they ought to be able to say to HMRC "we’ve done everything that you asked so why are you resisting our claim?”

If a claimant can put together the required information contemporaneously then HMRC would seem to have very few grounds for challenging a claim, unless the competent professional proves not to be so.

Whilst claimants could never guarantee not having an enquiry, they would be in a significantly weaker position if they hadn’t followed the new guidance.

Coming soon....

In my next article (due 30 November) I will be taking a deeper dive into the technical uncertainties, advance planning and the definition of a Competent Professional.

Article written by Rufus Meakin

Rufus Meakin helps companies prepare complex R&D Tax Credit claims where robust HMRC compliance is essential.

If you would like to discuss any aspect of your R&D Tax Credit claim then please feel free to call me on 0794 110 3285.