September 2019 – HMRC R&D Committee Update Posted on: September 29, 2019
Last week saw the second and last HMRC R&D Committee (RDCC) meeting of the year. Fear not, for the next one will be March 2020, assuming the politics allows! For this meeting, we found ourselves at the Churchill Room in HMRC’s 100 Parliament Street, London.
In this very room, on 8 May 1945, Winston Churchill went out on the balcony and famously delivered his ‘Victory in Europe’ speech – all somewhat ironic given the current political climate.
I learnt some interesting facts at this meeting… the Churchill Room has been used for some of the most important peacetime announcements of the last century, including the creation of the NHS and the independence of the Bank of England. Rather more unexpectedly, the lead HMRC R&D technical advisor also informs us that the internal walls are the first known instance of walls being made using MDF!
Now to business. Full minutes for the meeting will be released by HMRC in due course and I will share them on LinkedIn when they are published.
A summary of the most notable points from the committee meeting (with a focus on the points I get frequently asked about):
- SME R&D Credit cap
In response to a growing number of cases of attempted fraud looking to leverage potential weaknesses in the SME scheme, HMRC last year had proposed a cap on the payable cash credit. The original premise:
“In these cases, companies were set up to claim the cash available through the payable tax credit even though they had no R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite there being little employment or activity in the UK.
Budget 2018 announced that, to deter abuse, the amount of payable tax credit that a qualifying loss-making business can receive through the relief in any one year will be capped. The cap will be three times the company’s total PAYE and NICs liability for that year and will be implemented from April 2020 (after legislation in Finance Bill 2019-20).”
– Source: 2018 HMRC Consultation Report.
The proposal was put to consultation through the RDCC earlier this year, and the resulting feedback highlighted a number of concerns. The general consensus was that this proposal was just too heavy handed and disproportionate to the risks.
One example highlighted was in the scenario of a young company that has been intentionally setup to run ‘light-weight’, with no staff costs and directors working for free, and any cash in the company being used to directly pay for sub-contractor costs. The start-up is therefore loss-making, and in a pre-production speculative R&D phase, with no active trade or sales revenue gained or sought. Assuming the work is R&D qualifying, the company would be seeking R&D tax credits through the SME scheme. However, in this case, the company has no PAYE or NIC liabilities. The application of the cap (300% total PAYE and NICs liability), will equate to 300% of zero, meaning that no R&D tax credit is achievable. The proposal will therefore punish the very companies that so desperately need the scheme to work for them the most.
HMRC has now acknowledged these concerns and also taken onboard a number of suggestions from the RDCC collective. With this feedback now received and the consultation period over, HMRC have moved to design and incorporate new changes to the original proposal and finalise the rules.
The original target was to implement this change from April 2020 (after legislation in Finance Bill 2019-20). Given that the timing of the next budget is more than likely inextricably linked to the next election, and the timing of this election remains completely unknown (at the time of writing) – the April 2020 launch now seems unlikely. When pressed, HMRC could not give any indication for any potentially revised timings, when the new rules could be seen, or when any changes are likely to become law.
This uncertainty remains very frustrating to any company already worried by the original cap proposal.
- HMRC processing times
Since January 2019, both Large Company RDEC and SME claim processing times have slowed in an unprecedented manner. At its peak in June/July 2019, these delays were in the region of 90-130 days for SME claims, and even longer for RDEC claims.
The root of this problem resides in a combination of:
- A significant increase of R&D claims being received, especially during March 2019 (164% increase in March 2019 vs March 2018), and;
- A lack of staff in the HMRC R&D unit.
To address these problems, earlier this year, HMRC had taken action to bring in additional staff from other departments to the R&D unit, whilst also undertaking a restructure. HMRC has been in the process of implementing this plan for the past few months. I am told this implementation has included staff training that has also added to the delays. However, in the past fortnight, LinkStep has seen processing times improve considerably.
The target, stated by HMRC, is to bring both the RDEC (large company scheme) and the SME scheme back down to the original 28-day processing times.
HMRC stated that the restructure and new staffing capacity should be in full effect from 30th September, but it may take a few more weeks to catchup with the backlog. Our fear is that these delays could return during peak submission months of December and March – which has been the case for the past 2-3 years.
As a large company, if your tax affairs are managed by the Large Business Service (LBS), the current processing times are on average around 33 days. We have seen one LBS claim process in a week. Otherwise, current processing times are quite horrendous for companies defined as large. As of 23rd September, processing was up to 31 December 2018 for large company claims. This date has moved extremely slowly – improving by about 3 weeks over the past 8 months.
LinkStep and the wider RDCC members will do their best to hold HMRC to account and apply pressure for the 28-day target, as it is in everyone’s interest for HMRC to achieve this.
Important note: It is more important than ever to have your CT600 submission checked by your R&D tax advisor before your accountant submits. Frequently, key factors that create additional processing delays has included missing or incorrect details on the CT600 form. HMRC have again cited this point. Common mistakes include missing or incorrect BACs (bank) details, boxes not filled in properly, or the wrong figures being used.
- Agent Updates
A useful link from HMRC – here you can subscribe to agent updates from HMRC on a variety of matters, not just R&D tax. In the top right is a “Subscribe to email alerts”.
- Advance Clearance and Digital Forms
In the last 2 years, HMRC has moved to prototype and trial processes to
- Give advance assurance/clearance to R&D claims (but with heavy caveats), and,
- Introduce digital forms, with the aim of speeding up the compilation process or make this more accessible.
Both of these remain optional and come with considerable baggage. In the meeting there was an update on the progress of these two areas, but they remain a weak offering for businesses.
Whenever the subject of these two areas is raised at RDCC, it feels like a comedian receiving the painful ‘slow clap’, hoping that they call it a day.
As you can tell by my tone, I do not favour pushing our clients towards either of these options, and the luke warm uptake for these trials tends to suggest that wider industry is also not overly excited by these options.
HMRC are keen to ‘make tax digital’, but the reality is that R&D tax is not your usual area of taxation, and, for digital forms, automated claim preparation just doesn’t work well over a business-agnostic/generic approach when it comes to the digital forms.
For advance assurance, the trial has recently been expanded to large companies. 12 to be precise. I do not see either the SME or the large company advance scheme becoming popular. The easiest way to describe this is a heavily caveated pre-emptive enquiry process, whereby it assumes you explicitly know exactly what R&D you will be undertaking for the next 2 years.
If you want to know more about either of these subjects, or discuss them further, please do contact me directly. I am happy to see investigate the options with you to see if these approaches could be beneficial to your company.
Lastly, the elephant in the room, or perhaps the loudest elephant you have ever met – Brexit. For Brexit, the most common two questions I get asked are:
- What impact to R&D tax will there be?
- Will Brexit mark the end of R&D tax?
I have not seen any evidence to suggest R&D tax is about to end. There would be more evidence to support politicians and notable technology leaders pushing for increases to the rates, refinement of the rules, and to investigate how the scheme can be improved to speed up processing times.
I have heard our current (at the time of writing) PM talk about increasing R&D funding quite frequently. Even under a new premiership, sweeping tax reforms would be unlikely to suddenly radically reform or cancel R&D tax as their highest priority.
HMRC still report that the scheme yields a net return – for every £1 spent, the HM Treasury receive back between £1.53 and £2.35.
Looking globally, every major economy has an equivalent of the UK’s R&D tax regime. The origin of much of the UK R&D tax regime has been taken after studying the Canadian R&D scheme. You can see echoes of the wording of our legislation and guidelines in other countries around their world. Studies already state that Brexit, or what can be described as policies that push towards nationalism, do risk economic disruption concerning R&D. The top 3 countries at risk of this sort of economic disruption include the US, UK and China. Therefore, any move to reduce R&D funding would almost certainly adversely impact the economy.
In the context of Brexit (and in my opinion), the most foreseeable change would actually be to increase incentives to support growth, especially in the case of No Deal. Untethered from EU tax rules, the UK Government could, for example:
- Create new rules or different rates that could start to further incentivise/favour certain industries,
- Revise the threshold under the SME/Large company definition,
- Change restrictions on companies that claim for both R&D tax credits and receive state-aid/funding.
Early this month, it was announced that London had overtaken New York to become world’s No 1 city for investments in fintech firms. In the first 8 months of 2019, London attracted 114 investments with a record-breaking value of more than $2bn. Should any form of Brexit be executed, the immediate months that follow will be a sensitive time for the UK economy. Therefore, it will be vital that the UK Government supports the economy and its science and technology innovation.
As you can see, this committee meeting did not particularly cover new ground for R&D tax. The main feeling was that more would be known and settled after the next Budget, and potentially more would be known about policy after Brexit – assuming that is a rabbit hole that has a bottom!
– Paul Mann
Managing Director @ LinkStep R&D Tax Services