What does this mean for future claims?
Specifically, the statistics highlighted that small or medium-sized companies were far more likely to submit non-compliant claims than larger companies, with the percentage of non-compliance increasing to 3.6% in the RDEC scheme, and 24.4% in the SME scheme. This statistic will result in small or medium companies being targeted in compliance checks more than the larger companies as the government made it clear that this level of non-compliance is unacceptable. Therefore, businesses claiming under the SME scheme need to factor in responding to a compliance check as part of their R&D claim process.
In HMRC’s sector analysis of Standard Industrial Classification (SIC) codes, the highest levels of compliance were in claims where the main trade classification is ‘professional, scientific, and technical activities’, followed by manufacturing. Claims with the lowest rate of compliance include Education, Construction, and ‘Arts, Entertainment, and recreation”. HMRC estimates that only 11% of claims in the Education sector are complaint, whereas 69% of manufacturers were complaint. Given the estimated low level of compliance among sectors such as construction and education, it’s likely that future claims for R&D tax relief in these sectors will continue to be under close scrutiny by HMRC. If your SIC code registered with companies house falls within a high-risk sector, you should prepare for a compliance check in the near future, in sectors such as care home or restaurants where HMRC have flagged as being non-qualifying, making a claim will be extremely difficult going forward.
Based on HMRC’s updated analysis, as the size of expenditure decreases, the value of the non-compliance expressed as a percentage of the value of the claim, increases. For example, in claims where expenditure exceeded £1 million, around 75% of claims were fully complaint, however, in claims where the expenditure was less than £10,000, over 75% of the value of the claim was non-compliant. Here, the smaller the amount being claimed for, the more likely it was to be non-compliant, which supports HMRC’s long-held viewpoint that to be undertaking eligible R&D, you must invest sufficiently. This presents innovative new start-ups with a conundrum. They may not have the resources available to defend their claim in the case of a compliance check, so should they claim or wait until the business is bigger? This will potentially cut off a source of funding for new businesses that are too fearful about making a claim in the current challenging environment.