You’ll no doubt be aware HMRC is currently undergoing a considerable reform of the R&D Tax Relief scheme; for the good and bad. Under significant media pressure, a key driving force for HMRC is to combat the increasing number of fraudulent claims from criminal organisations. The underlying tactics are to tighten up the compliance process, making it easier to determine what is deemed as eligible R&D. The outcome is anticipated to be fewer fraudulent claims slipping through the net and fewer HMRC enquiries.
This new world of R&D is set to launch in April 2023, with significant changes going live to this once hugely generous tax relief scheme. These changes will massively impact the net benefit for SMEs, introducing new rules for eligible companies and R&D providers to navigate. One of those rules, which may seem small-scale, is the pre-notification of R&D claims.
WHAT IS THE PRE-NOTIFICATION OF R&D CLAIMS?
As it sounds, the pre-notification of R&D claims will require claimants to submit an advance notification of their R&D claim to HMRC if they are new claimants or have not claimed in the previous three accounting periods.
WHO IS REQUIRED TO GIVE PRE-NOTIFICATION?
To be explicit, this is companies that have not made an R&D claim or notification in the preceding three accounting periods or, those who have made an R&D claim or notification, but it was before the preceding three accounting periods.
This will apply to all types of R&D Tax Relief claims, SME and RDEC, regardless of whether a tax credit is expected or simply a reduction in corporation tax.
In summary, any R&D claim you are looking to make will require a pre-notification, and given the specificity of the legislation, there is the potential that HMRC will want to know the route you are likely to take.
HOW IS THE PRE-NOTIFICATION PROCESS LIKELY TO OPERATE?
HMRC has the legislative rights to dictate how this pre-notification will look and is yet to confirm the exact requirements. HMRC has noted that secondary legislation will be introduced with effect from April 2023. At this point, we will have confirmation of the information to be provided, the format, and the process in which it will be submitted.
However, we can assume HMRC will follow the format of the advance assurance document. If it already exists, why not?
We’re expecting several multiple-choice questions, such as:
Have you claimed R&D before?
Are you part of a group?
General company information [CRN etc.]
Who is making the notification?
Subcontracted/Subsidised
Are you doing the work for someone/being paid to do it?
As well as more detailed information that could include:
Project queries:
- Proposed R&D Activities
- What is the advance sought?
- What are the uncertainties faced?
- How do you plan on overcoming them?
- Why is this above and beyond the market & competent professional knowledge? - Potential value
Then, you cross everything and trust you get the nod that you meet the eligibility requirements! That’s if they even have the capacity to review all submissions in the first place! Finally, we expect that even if assurance is granted, this will only be for the foundation claim, and specifics may be queried.
You will be able to submit the notification as early as the first day of the accounting period you would like to make a claim against, up to six months after the accounting period ends. This is expected to be the case for the year ends ending on or after 1st April 2023.
WHAT DO I NEED TO CONSIDER NOW?
Over the coming months, there are recommendations we urge you to consider in preparation for the introduction of pre-notification.
YEAR-END MEETINGS: Use year-end meetings to highlight R&D with your clients. It’s better to put in a notification than not. Once it’s submitted, you don’t have to think about it for three years. PRICING: You may wish to consider a small fee for submitting the pre-notification, which you could subsequently offset against the entire claim. FUTURE PROJECTS: The pre-notification process provides a framework for future work, using repeat phrasing so as not to confuse or de-rail HMRC.
A final consideration to leave you pondering is, will HMRC later stipulate that the three-year notification/claim window relates to projects alone? Or is it their way of checking that a company understands R&D rather than the specific project matter?
Right now no-one knows; it’s a case of watching this space and awaiting the secondary legislation!
DTX’ers, if you have a client with a future R&D Tax Relief claim you’d like to discuss, please book a scoping call.
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