Peers call for “onerous” R&D claims advance notification proposal to be dropped

The Lords Economics Affairs Finance Bill Sub-Committee, which is chaired by chartered tax adviser Lord Leigh of Hurley, focused on proposed changes to the reliefs and took evidence from a range of witnesses including representatives of ATT.

The final report cites ATT 19 times . You can read our response to the report here.

Key recommendations

Key conclusions and recommendations of the report, ‘Research and development tax relief and expenditure credit’ are:

• Improvements are required to HMRC’s compliance capability, including a more focused and targeted approach to identifying potentially fraudulent claims, greater staff expertise and extra resourcing.
• Fraud and error could be mitigated before claims are made if HMRC improved the guidance and communications it provides to businesses and extended its existing Advanced Assurance process for claims by small and medium enterprises (SMEs).
• The sub-committee welcomed the proposals to include cloud computing and data licensing costs in an extended list of qualifying expenditure for relief, and to include pure mathematics within the scope of the definition for R&D.
• HMRC should consider what steps it can take to resolve uncertainty around the meaning of “subsidised expenditure” and address concerns raised during the inquiry.
• BEIS and HMRC should work together on a new awareness campaign aimed at providing SMEs with accurate information about what is and is not R&D.
• HMRC should work with representative bodies and business to improve the accuracy and user-friendliness of its R&D relief guidance.

Abuse, fraud and error

The sub-committee said that while R&D makes an important contribution to the UK’s economy, it is concerned at the evidence of rising fraud and error in the system.

This includes targeted attacks from criminal gangs, including one in April last year which led to HMRC pausing payments for two weeks while security measures were strengthened. The report notes that CIOT said it understood the reasons for the suspension, but called it “very disruptive” and criticised “poor communication from HMRC”, with the department still operating with an extended target of 40 days turnaround (as opposed to the standard 28).

There were also concerns about the number of spurious claims being made to the scheme and poor administration by HMRC staff. In evidence to the sub-committee David O’Keeffe of CIOT branded the compliance process “ineffective”, saying: “too many claims are getting through that, frankly, should not get through”, while CIOT also highlighted that HMRC staff would sometimes request information already provided in the application.

The sub-committee said HMRC was already “not sufficiently resourced” and new legislation may put greater pressure on these resources. It recommended that the Government consider making additional resources available and review staff training to “ensure it is providing officers with the skills and knowledge they need to work effectively and appropriately with businesses”.

The draft Finance Bill includes several proposed requirements intended to tackle levels of fraud, including asking claimants to provide more detailed information about the nature of the claim; name any tax advisers involved in its preparation; signing off of the claim by a senior officer of the company; and pre-notifications within six months of the end of the company’s accounting period to which it relates.

In evidence cited by the sub-committee ATT supported “the proposed requirement for claims to include more information” but felt that “clear guidance will be needed” on exactly what was required. CIOT added that while collecting extra information was a “great first step”, it is “utterly useless if nothing is done with it”.

The proposal to introduce pre-notifications was met widespread criticism, with CIOT warning it would prevent some genuine claimants from accessing the relief, while not necessarily leading to a significant reduction in abuse, and that it could even increase HMRC’s workload by encouraging taxpayers to make ‘protective advance notifications’: notifications that may not lead to claims.

ATT added the proposal was simply “introducing more hurdles for genuine claimants without getting to the root cause and tackling the abuse.” Giving oral evidence Technical Officer Emma Rawson explained: “The minority of agents who are pushing for inappropriate claims using high-pressured sales techniques will just factor it into their business processes. We do not think it will be enough to put them off”.

The sub-committee agreed, calling the requirement “uniquely onerous” on claimants, with “questionable” benefits in countering abuse, and called for it to be removed from the bill.

Evidence from witnesses also suggested that unregulated advisers were responsible for the majority of spurious claims. CIOT said: “The UK does not regulate tax advice and, as a result, there are agents in the R&D market that do not adhere to the strict professional standards. The problems in the R&D market are very much a reflection of the need to pursue the raising standards agenda more vigorously.”

Administration of relief and SMEs

The sub-committee said businesses, especially SMEs, need clear guidance on R&D relief in order for the system to work.

It called for the Government to “take control of the narrative” and recommended that HMRC and BEIS (the business department) work together on a new awareness campaign aimed at providing SMEs with accurate information about what does and does not qualify as R&D.

The sub-committee reports ATT concerns that awareness of R&D relief differs among small businesses, with those using tax agents more aware than those who handle their own affairs. Many became aware of the relief from existing accountants, being contacted by specialist advisers or word-of-mouth from other businesses. The report notes that Rawson said there is currently a “broad definition” of R&D, while O’Keeffe said the process of applying for relief also contributed to the complexity. Both ATT and CIOT said the BEIS Guidelines, which define R&D, were broadly helpful but suggested improvements. ATT said that “more practical examples would be welcome”. CIOT called the guidelines “somewhat outdated” and suggested adding supplementary sections, “in particular around some of the newer areas in the rules like the expenditure categories of cloud computing and data and also around digital and technology sectors, and the modern economy more generally”.

The peers note that CIOT described HMRC’s CIRD Manual as “less consistently good” than the BEIS Guidelines and “in places, ambiguous and unclear”. The report recommends that BEIS work with HMRC to agree additional “real-world” examples to the guidelines, as well as consulting with stakeholders on a planned review of the CIRD Manual.

Particular attention is paid in the report to the uncertainty around the meaning of “subsidised expenditure” following the decision in the Quinn (London) Limited tribunal case that told HMRC its view was wrong. The peers note CIOT’s comments that “the current position is detrimental to HMRC’s overall efforts to … encourage compliance, because HMRC are permitting a situation of uncertainty to continue and are not taking any of the steps available to government to resolve the uncertainty.” The report says that HMRC “should consider what steps it can take to help resolve this uncertainty and address the concerns raised with us in evidence.”

The sub-committee notes that CIOT told them that “the approach by HMRC to compliance with R&D relief can be unnecessarily aggressive and err towards apparently assuming errors have been made”. The peers express concern and emphasise that “the Charter requirement that HMRC deal with taxpayers fairly should underpin its work in R&D relief cases as much as other areas of HMRC’s work.”

Restricting relief to R&D carried out in the UK

On a proposal to restrict the relief to R&D carried out in the UK rather than worldwide, the report draws attention to CIOT’s observation that much of the work currently carried out overseas is done there because of the availability of skills or resources which may not be unavailable, or available at a higher price, in the UK. It notes the warning that a “cliff edge cut off” could result in R&D activity just moving offshore, rather than expertise being developed in the UK. CIOT said: “It would be sensible if companies were to be allowed time to develop equivalent expertise and resource in the UK.”

The sub-committee conclude that while R&D relief cannot be “unrestricted” for overseas expenditure, the proposal has a risk of being unsuccessful and could result in some R&D activities which currently take place in the UK being relocated to other countries. It recommends that the Government considers introducing some form of transitional relief for expenditure on specialised resource which is not available in the UK, especially for contracts already entered into, which would give companies time to adjust to the new rules.

Other areas

CIOT joined UK Research and Innovation (UKRI), in recommending aligning the UK definition of R&D more closely with the OECD’s Frascati definition, the report notes.

On government plans to consult on a merger of the two R&D relief schemes, SME relief and R&D expenditure credit, into a single “RDEC-for-all” scheme, ATT mentioned evidence of start-up companies “choosing not to claim R&D at all, as they do not wish to go to the extra expense and trouble of claiming under RDEC”.