R&D credit cap may hamper genuine claims, but not stop fraud

27 August 2020: ICAEW has raised concerns that some genuine research and development (R&D) businesses could be impacted by proposals to tackle tax relief abuse, while its unclear how the measures will tackle low-value fraudulent claims.

The government’s stated objective in its consultation Preventing abuse of the R&D tax relief for SMEs: second consultation is to reduce the number of fraudulent claims for R&D relief, specifically those exploiting the tax repayment available under the SME scheme. The measures will limit claims for a payable R&D credit by reference to the claimant’s pay as you earn (PAYE) liabilities.

While ICAEW supports HMRC’s desire to tackle abuse of R&D relief, it has concerns that some of the measures might increase administrative burdens on compliant businesses and potentially preclude genuine claims.

In ICAEW Representation 55/20, ICAEW welcomes HMRC’s proposal that claims below £20,000 will not be affected by the cap, which will mitigate the impact of the proposals significantly, especially for start-up ventures. However, ICAEW highlights that it remains unclear how this measure will prevent larger volumes of lower value fraudulent claims.

HMRC proposes that genuine R&D businesses can make an uncapped claim if they provide evidence around the management of intellectual property (IP) to support the claim. In its consultation response, ICAEW argues that management of IP in the context of an R&D project could be problematic to evidence and rely heavily on internal documents and correspondence, which would be open to abuse in any event.

ICAEW will continue to work with HMRC around any reforms of R&D tax relief including the ongoing consultation on the scope of R&D expenditure, which closes on 13 October. Any comments regarding this consultation should be emailed to angela.clegg@icaew.com by 30 September.