New Rules for R&D Tax Claims
The recent updates introduced in the Finance Act 2024 (FA2024) have significantly altered the rules surrounding Research and Development (R&D) tax claims. These changes, particularly to the “three-year window” for claims, could catch many businesses off guard.
Changes to the Three-Year Rule
Previously, businesses that had made an R&D claim in the last three years did not need to notify HMRC of their intention to claim again. However, under the new rules, this three-year exemption now only applies if:
- The claim period begins on or after 1 April 2023.
- The claim was included in the original tax return.
- The claim was made through an amended return submitted before 1 April 2023.
- This change means that businesses relying on historical claims could face challenges if they do not meet the revised criteria. Careful planning and review of previous claim periods are now essential to ensure compliance.
Changing accounting dates
If your business has submitted an R&D notification and subsequently changes its accounting date, the original notification becomes invalid. A new notification must be submitted to reflect the updated accounting period.
This could be particularly problematic if the accounting date is changed more than six months after the original year-end. Businesses should be cautious and plan changes to their accounting period well in advance to avoid compliance issues.
Handling HMRC enquiries
HMRC’s approach to R&D enquiries can vary significantly depending on the department handling the case:
- Wealthy & Mid-sized Business Compliance (WMBC): These cases are typically managed by a single, named officer who provides tailored responses and tends to have more expertise in R&D claims.
- Individual & Small Business Compliance (ISBC): These enquiries are often handled by multiple officers, resulting in less consistency and a higher likelihood of template-based responses. This can sometimes lead to errors or misinterpretations.
Businesses should carefully review HMRC’s responses and, where necessary, push back on decisions that appear to disregard evidence provided by competent professionals.
The role of the solicitors office and legal service
Businesses seeking an independent review of an HMRC decision can request the Solicitors Office and Legal Service (SOLS) process. However, success rates for taxpayers remain low. Recent statistics show that out of 250 cases reviewed, HMRC reversed their decision in just five cases, with partial reversals in 30. This underscores the importance of preparing robust initial claims and evidence to minimize disputes.
Lessons from recent tribunal cases
While not legally binding, recent First Tier Tribunal (FTT) cases offer useful insights into R&D claim disputes:
- Get Onbord Ltd: This software case highlighted that R&D often builds on existing technology rather than being entirely novel. The tribunal emphasised that businesses must provide sufficient evidence to support their claims, but the burden of proof shifts to HMRC once reasonable evidence is presented.
- Tills Plus Ltd: This case involving subcontractor payments demonstrated the importance of evidence from a competent professional to establish whether activities meet the R&D criteria. Without such evidence, claims risk being dismissed as routine work.
Key takeaways for businesses
The updates to R&D claim rules and HMRC’s handling of enquiries reinforce the importance of meticulous preparation and documentation. Businesses should:
- Review historical claims to ensure they meet the revised criteria.
- Plan accounting changes carefully to avoid invalidating notifications.
- Prepare detailed, evidence-based reports supported by competent professionals.
- Proactively address any procedural issues in HMRC communications.
For more tailored information around these new rules or anything else tax related, contact our Business Tax Team on 01903 234094.
