SME construction companies urged to be meticulous when making R&D claims
SME construction companies are advised to be especially meticulous with their claims for research and development (R&D) tax relief – as HMRC continues its crackdown on non-compliant applications.
HMRC has revealed £110m of fraud and error in R&D tax relief claimed by SMEs in the construction sector in 2020-21.
These figures were published in a report earlier this month ahead of tighter R&D rules coming into force in August.
According to the report, there were 7,600 claims for R&D tax relief by SME construction firms in 2020-21, with a total value of £260m.
HMRC’s revised estimates of error and fraud by sector show that 62% of R&D claims by construction SMEs were judged as either wholly or partially non-compliant which means that only 38% were judged to be compliant.
In the past three years, HMRC has more than doubled the number of people working on R&D compliance, with 300 more staff. In July 2022, it also set up an anti-abuse unit, specifically to deal with incorrect claims and to open enquiries into the most complex of cases.
Changes from August
HMRC will introduce new checks on claims on 8 August 2023 (deferred from 1 August 2023 due to delays in Finance Bill timetabling). From that date, claimants or their R&D advisers will have to complete an additional information form designed to allow HMRC to quickly assess the validity of any claim and the level of expertise of any R&D agent used to prepare the claim.
For full details of what additional information will be required from 8 August 2023 click here to read our previous article.
Implications for the construction sector
Given that the level of compliance among construction businesses is estimated by HMRC to be relatively low compared to other sectors, it’s very likely that claims for R&D tax relief from construction companies will continue to be under close scrutiny by HMRC.
Construction business must plan carefully for R&D tax claims and put in place new processes to collect the right information, to support their R&D claims where necessary.
The figures in the HMRC report and the process by which they were calculated have raised eyebrows among tax professional though and in a letter to HMRC published on 3 July, the Chartered Institute of Taxation (CIOT) highlighted many issues with HMRC’s current volume compliance approach, which brings into doubt the validity of its findings.
The CIOT letter mentions its ‘strong disagreement with HMRC’s view of the application of the law’ in respect of subcontracting, which is particularly prevalent for SME subcontractors.
However, it is safe to assume that HMRC will use this data to justify increasing the number of enquiries opened for construction industry R&D tax claims, which is not good news for the industry.
If your businesses is facing an enquiry into R&D claims you are advised to take expert advice from reputable experts in dealing with R&D investigations. Please get in touch with our expert team if you need support.
The information was correct at time of publishing but may now be out of date.