As we progress through 2024, the Research and Development (R&D) tax relief landscape in the United Kingdom is undergoing significant changes. For fintech entrepreneurs, payment institutions, and FCA-registered companies, understanding these shifts is crucial for maximizing benefits while ensuring compliance.
What is the R&D Tax Relief Framework
The R&D tax relief offered by HM Revenue and Customs (HMRC) in the UK is a government incentive designed to support businesses investing in innovation. This relief allows companies to claim tax credits for their research and development activities, reducing their overall tax liabilities.
For example, small and medium-sized enterprises (SMEs) can deduct an extra 130% of their qualifying R&D costs from their annual profit, in addition to the normal 100% deduction, making a total 230% deduction.
The New 2024 R&D Tax Relief Framework
As of April 2024, HMRC has introduced a new consolidated R&D scheme to streamline the process and address significant issues of error and fraud. For fintech and payment businesses, these changes mean more rigorous record-keeping and a heightened focus on claim accuracy to successfully navigate the new landscape and continue benefiting from the R&D tax relief.
Addressing Fraud and Errors:
A Key Driver for Change
The impetus for these changes stems from HMRC’s discovery of substantial error and fraud levels in R&D claims. Recent data reveals that:
- In the 2020-21 fiscal year, an estimated £1.13 billion was lost due to errors and fraudulent activities in R&D tax relief claims.
- The overall level of error and fraud for both SME and RDEC schemes in 2020-21 was estimated at 16.7%, significantly higher than the previous estimate of 3.6%.
- The SME scheme was particularly affected, with an estimated error and fraud rate of 24.4% for 2020-21.
HMRC’s Enhanced Scrutiny: The “Volume Compliance” Approach
In response to these findings, HMRC has adopted a “volume compliance” approach to assessing R&D claims. This strategy involves:
- Deployment of 300 new R&D staff to enhance scrutiny capabilities.
- Introduction of additional checks on claims from August 1, 2023.
- Implementation of an Additional Information Form for claimants to facilitate rapid assessment of claim validity.
Implications for Fintech and Payment Businesses
For companies in the fintech and payments sector, these changes have several important implications:
- Increased Documentation Requirements: Meticulous record-keeping of R&D activities, costs, and project outcomes is now more critical than ever.
- Heightened Risk of Scrutiny: With HMRC’s enhanced focus, even legitimate claims may face increased examination. In fact, HMRC identified a pattern of irregular R&D claims in April 2022, leading to the establishment of a threat risk assessment process for all R&D claims.
- Sector-Specific Risk Profiling: HMRC has risk-profiled claims across different business sectors. While specific data for fintech is not available, it’s worth noting that in the broader context, only 69% of claims made by Manufacturing sector businesses were deemed compliant.
- Claim Size Considerations: HMRC estimates that 78% of claims for less than £10,000 are suspected to be non-compliant. This suggests that smaller claims may face higher scrutiny.
Strategies for Successful R&D Claims
To navigate this new landscape effectively, consider the following strategies:
- Stay Informed: Regularly update your knowledge of HMRC guidelines and requirements for R&D Relief claims.
- Seek Expert Advice: Consider partnering with R&D tax specialists who understand the nuances of the fintech and payments sector.
- Conduct Internal Audits: Regular reviews of your R&D activities and documentation can help identify potential issues before submission.
- Focus on Innovation Quality: HMRC’s estimates suggest that unless significant resources are invested in an R&D project, it’s unlikely to qualify for relief.
Common Mistakes in R&D Tax Relief Claims and How to Avoid Them
Even small errors can lead to significant issues. Here are the top common mistakes businesses make when claiming R&D tax relief, along with data to support each point and tips on how to avoid them.
1. Failing to Keep Precise Records
According to a survey by HMRC, 73% of R&D tax relief claims that faced enquiries had inadequate supporting documentation.
How to Avoid: Maintain meticulous records of all R&D activities, including project plans, research notes, trial outcomes, and financial documents. Aim to document at least 80% of your R&D processes and expenditures.
2. Misinterpreting HMRC Guidelines
HMRC reports that 62% of R&D tax relief claims are disputed due to errors in understanding eligibility criteria.
How to Avoid: Stay updated with HMRC’s latest guidance and consider seeking professional advice to ensure compliance. Attend at least 2-3 HMRC webinars or workshops annually to stay informed.
3. Overlooking Eligible Costs
A study by ForrestBrown found that 41% of businesses underestimate their qualifying R&D expenditure by an average of £53,000.
How to Avoid: Thoroughly review all costs associated with your R&D projects. Consult with R&D tax specialists to ensure you are claiming all eligible expenses. Conduct quarterly internal audits to identify overlooked costs.
4. Claiming Under the Wrong Scheme
HMRC statistics show that 18% of SMEs incorrectly claimed under the RDEC scheme instead of the SME scheme in the 2021-2022 fiscal year.
How to Avoid: Understand the differences between the SME and RDEC schemes. Ensure you are claiming under the correct scheme by consulting with a knowledgeable advisor who can guide you through the eligibility criteria and application process.
5. Not Submitting Correct Information
HMRC reports that 35% of R&D claims contain inaccurate financial data, leading to delays in processing and potential rejections.
How to Avoid: Keep accurate financial records of all R&D-related expenditures. Double-check all figures before submission and consider having a professional review your claim to ensure accuracy. Aim for a 99% accuracy rate in your financial data.
6. Waiting Too Long to File a Claim
According to HMRC, 22% of eligible companies miss out on R&D tax relief by failing to file within the two-year deadline.
How to Avoid: Start the claims preparation process early. Ensure your company accounts and tax returns are prepared promptly. Set a goal to file your R&D tax credits claim within 18 months from the end of your accounting period.
7. Inadequate Documentation of Subcontractor and Subsidised Costs
A study by RSM UK found that 28% of R&D claims faced scrutiny due to incorrect handling of subcontractor and subsidised costs.
How to Avoid: Ensure that all subcontractor and subsidised costs are accurately documented and eligible under the scheme you are claiming. Consult with R&D tax specialists to verify the eligibility of these costs. Aim to have 100% documentation for all subcontractor work related to R&D.
Conclusion
While the R&D tax relief landscape is becoming more complex, it continues to offer significant opportunities for innovative fintech and payment businesses. By staying informed, maintaining rigorous documentation, and seeking expert guidance when needed, companies can continue to benefit from these incentives while navigating the increased scrutiny from HMRC.
By avoiding common mistakes, such as failing to keep precise records, misinterpreting guidelines, and overlooking eligible costs, businesses can significantly improve their chances of a successful R&D tax relief claim. The data shows that attention to detail, proper understanding of HMRC guidelines, and timely action are crucial.
For further insights and personalized guidance, consider booking a consultation with our team of R&D specialists. We’re here to help you maximize your claim and drive your business forward.
