Institute welcomes Lords call for dropping of R&D claims advance notification proposal

However, the House of Lords Finance Bill Sub-Committee, in a report¹ published today, called the requirement “uniquely onerous” on claimants, with “questionable” benefits in countering abuse, and called for it to be removed from the bill.

In making the recommendation the committee cites oral and written evidence provided to it by CIOT, which warned that the advance notification requirement 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.

David O’Keeffe, CIOT spokesperson on R&D tax relief, said:

“This is an impressive report. The Lords sub-committee has carried out a thorough inquiry into the UK’s R&D tax credits system, taking evidence from a wide range of witnesses and makes some sensible recommendations which the Government should heed.

“The call for the Government to drop advance notifications for claims is particularly significant. As the sub-committee notes, there was almost universal opposition to this proposal among the evidence it received, including from CIOT.

“This measure is poorly targeted because, although it will prevent some dubious claims, it will also mean that many genuine claims will fall out of time. It will exacerbate an existing unfairness that can arise between taxpayer companies that undertake R&D activities, based on whether or not they have an awareness of the tax relief rules at the appropriate time. It will disproportionately hurt smaller and newer companies – the kinds of companies that may only get tax advice during the year end compliance process (and often after the six-month window for pre-notification), rather than all year round.

“We hope the Government will think again on this proposal.”

The CIOT has also welcomed other recommendations in the report, including that HMRC and BEIS (the business department) should work together on a new awareness campaign aimed at SMEs on what is and is not R&D, and that HMRC should work with representative bodies and others to improve the accuracy and user-friendliness of its published guidance on R&D relief.

David O’Keeffe said:

“There remains a low level of awareness of R&D relief amongst some smaller businesses, and it should be a priority for the Government to tackle this.”

However, CIOT said that one area where the Lords might have been stronger is in relation to the Government’s interpretations of ‘subsidised’ and ‘subcontracted’ expenditure.

David O’Keeffe said:

“HMRC seem to have changed their interpretation of the existing rules of the SME R&D scheme in such a way that they act almost as ‘catch-all’ provisions to deny relief. They have been told by a tribunal that their interpretation is wrong, but appear unwilling to change their approach.

“The Lords have said that HMRC should consider what steps it can take to help resolve this uncertainty and address the concerns raised by ourselves and other witnesses. We hope they will do this with some urgency.”²