R&D Tax Credit expert, Dr. Chris Brown, shares his highlights from the latest R&D Consultative Committee meeting.
On Thursday I attended the latest meeting of the R&D Consultative Committee, a group of HMRC staff and respected R&D Tax Credits consultants that meets twice a year to discuss the future of the R&D Tax Credits scheme.
I’m proud to be a member of the committee. And to use GrantTree’s membership as a platform to offer our perspective and champion our clients’ needs.
In the latest meeting, we discussed how HMRC was planning to clamp down on fraud and put an end to ‘cowboy claimants’.
Plus, we tackled everyone’s favourite topic: what’s going to happen after Brexit.
The B word
Brexit is item one on everyone’s agenda. No surprise then that it was a hot topic at this latest meeting of the RDCC. Consultants were anxious to know how Britain’s leaving the European Union would affect R&D Tax Credits.
The good news is that, according to the latest R&D Consultative Committee meeting, HMRC has absolutely no plans to change the scheme, just as long as we leave with some kind of deal.
There might be problems on the horizon if we have a ‘no deal’ Brexit, though, which is a distinct possibility at the moment.
The R&D Tax Credits scheme for SMEs is classified as a notifiable state aid, which is currently policed by the European Union. If we were to sever all ties with Europe, the plan would be for the UK government’s Competition and Markets Authority (CMA) to take over all notified state aid, both within R&D and other fields.
This will require some adjustment to the initiative, notably how we decide which companies are eligible for the SME scheme.
Companies qualify for SME status if they’re below a certain size, determined by the number of staff they have and, more relevantly, their turnover and balance sheet, both of which are presently measured in terms of Euros, not Pound Sterling.
The government would need to amend these definitions via finance bills before a no deal Brexit. Thankfully this is a fairly minor issue. So it’s unlikely to cause any real disruption.
Clamping down on fraud
In 2018, HMRC intercepted and rejected £300m worth of fraudulent claims for R&D Tax Credits, about 8% of the total value of the scheme. It’s also likely that some false claims will have been accepted.
This means the total number of fraudulent claims will have been even higher.
HMRC has seen particular growth in fake claims from companies with artificial corporate structures. These are basically shell companies that have been set up purely to steal R&D Tax Credits from the UK government.
They have little to no actual presence in the UK.
To combat this, Chancellor Philip Hammond announced in the autumn budget that tax credits payouts will be capped at 300% of a company’s combined NIC and PAYE liability.
So if a company spends £100k on NIC and PAYE taxes during a financial year, the maximum tax credits rebate they can receive is £300k.
This cap won’t affect profitable companies using the R&D scheme to reduce their corporation tax bill.
Note: HMRC announced the final details of the PAYE Cap in November 2020. You can about them here.
This PAYE Cap is due to kick in for companies with accounting periods starting on or after 1st April 2020.
You can click here if you want to know whether your company will be affected.
The cap will stop shell companies, with no proper presence in the UK, from filing claims. But other, genuine companies will also be caught in the crossfire.
The PAYE Cap in action
Take, for example, a very early stage, pre-revenue company, where the owner is inventing a new machine.
She may not pay herself a wage (why would she? The money put into the company is her own) or have any other employees.
This would mean that her NIC and PAYE taxes for the year would be £0 and she’d be completely ineligible for R&D Tax Credits. So even though she might be conducting eligible R&D, she won’t be able to claim a penny of her expenditure back.
HMRC is still consulting on this amendment. Through the RDCC committee, GrantTree has been canvassing hard for a more nuanced solution that grants small businesses and intrepid entrepreneurs continued access to tax credits.
Specifically, we would like to see a de-minimis threshold put in place. This would mean that the cap does not apply to claim sizes under £50,000.
That would be too small to make it worth the effort and expense of establishing a phoney shell operation, but large enough to keep R&D benefits for early-stage innovators that are so well supported by the current scheme.
The end of cowboy claimants
HMRC is putting an end to ‘cowboy claimants’.
Under current rules, companies can write an email to HMRC stating simply how much qualifying R&D expenditure they made during the financial year. HMRC will then, very generously, complete their corporation tax computations on their behalf.
This puts more work on HMRC’s already piled-high plate, and is, in many ways, incredibly unfair.
Sensibly, in the R&D Consultative Committee, HMRC announced it was introducing a new policy requiring companies to complete their CT600s, and their corporation tax calculations, themselves.
The policy will come into force on April 1st 2019 and will require companies to file their tax submission through HMRC’s COTAX online portal. Also, the CT600 will need to be signed by a company director.
If these documents aren’t complete, HMRC will no longer consider companies’ submissions to be an acceptable R&D claim. So they will simply send a rejection email back to the sender. The company will then need to file an amended return if they want to access their R&D tax credits.
But here’s the kicker. If, even with the amendment, your return doesn’t meet HMRC’s standards, and the submission is finalised after the eligibility window for tax credits (i.e. two years after the end of the financial period in which the R&D took place) your claim, and tax credits payout, will be totally forfeited.
HMRC recognises this will be a fairly substantial adjustment for some companies. That’s why the agency created a three month transition period to help companies get up to speed.
Ending 30 June 2019, the transition period will extend the eligibility window by an extra 30 days. So you’ll have more time to get the correct amended return put together.
This only applies to companies approaching the two-year deadline for R&D Tax Credits, and effectively extends the window to a maximum of 25 months, in certain situations.
GrantTree always submits the full tax computation and correct CT600 to HMRC for our clients.
So this change won’t affect them.
If anything, our clients might benefit from this change. That’s because HMRC inspectors will have more time to process completed claims rather than filling them out on companies’ behalf.
We might even see processing times speed up. Dare to dream!
Other companies, though, risk losing out on R&D Tax Credits altogether. Given the average tax credits payout last year was £88,000, this is a lot of money to leave on the table.
I’d advise any companies worried about this policy change should give us a call. Our tax credits experts would be happy to help.