The amount of tax HMRC is disputing with big businesses over research and development (R&D) tax credit claims has nearly quadrupled in the past year.
The amount has increased 372% from £90 million to £425 million, says leading law firm, Pinsent Masons.
The steep rise could be suggestive of large businesses claiming increased amounts of R&D tax credits under the new, more generous Research and Development Expenditure Credit Scheme. The total amount of R&D support claimed under the scheme rose by 20% to £2.88 billion in the last year.
The new R&D tax credits system, introduced in April 2013, allows large companies to claim a cash credit from HMRC based on their qualifying R&D expenditure.
Large businesses can now claim tax relief on qualifying R&D costs of 130%. If the company has a trading loss this can be increased by 30% of the qualifying R&D costs.
Previously, big businesses were entitled to only an enhanced deduction of 30% on qualifying expenditure, and losses generated under the scheme were not eligible.
The major change to the R&D tax credit system has been to make credits ‘above the line’, which means they are recognised in the company’s pre-tax profits, rather than just being a relief that reduces the company’s tax liability, which incentivises more claims.
Because of this, HMRC’s Large Business Directorate is now starting to challenge more tax relief claims that companies can apply for on R&D projects.
The £425 million under dispute is part of ‘Tax Under Consideration’, which is what the Department estimates the maximum potential additional tax liability is across all enquiries, before full investigations have been completed.
Ian Hyde, Partner at Pinsent Masons, commented: “R&D tax relief is now clearly a target for HMRC in ensuring that they maximise their tax take from businesses.”
“With a rise in the number of R&D claims made by large firms, partly because of changes to how they can claim relief, HMRC is reviewing these claims more carefully.”
“It is important that HMRC has enough resources to resolve the rising number of claims, especially if they are determined to challenge any perceived underpayment of corporation tax.”
“However, despite HMRC claiming the tax claims are being investigated, it does not mean that the credits are not due. £400 million is the headline figure that they estimate may not have been properly claimed. The amount of credits that HMRC will actually deny as a result of its investigations will be significantly lower.”
“We are seeing across a number of areas that HMRC are increasingly seeing tax avoidance in taxpayers’ use of statutory reliefs. While the Government looks to target underpayment of tax, it needs to ensure that reliefs do what they are supposed to and businesses are incentivised to invest in R&D. Businesses should not be deterred from seeking legitimate tax relief that is a crucial tool in improving the competitiveness of the UK economy.”