R&D Tax Relief Is Changing: Is your business ready for Pre-Notification?

Don’t get caught out by the upcoming research and development (R&D) Tax Relief legislation changes, or you might lose out on the chance of claiming essential financial relief through R&D Tax Credits.

The requirement to make a claim notification will only apply to new R&D claimants, and claimants who have not made an R&D claim in the last three accounting periods. This notification must be submitted not more than six months after the end of the accounting period to which the R&D claim relates, or the claim will be invalid. Secondary legislation will be introduced with effect from April 2023 setting out the information to be provided with the notification, and the form and manner in which the notification is to be made.

Businesses and advisers should now consider upcoming R&D expenditure and whether pre-notification is merited. Based on the current information, there does not appear to be any downside (e.g. penalties) for submitting a protective notification where there is uncertainty over whether the expenditure qualifies for R&D tax relief. Indeed, we expect HMRC will be swamped with protective notifications with no follow-up R&D claim once there has been sufficient time to analyse the expenditure. Of course, most impacted businesses will not be aware of the change as it has not been sufficiently publicised by HMRC.     

By effectively artificially bringing forward the deadline for making a claim (which will not coincide with other relevant tax deadlines and therefore be easy to miss), the window to apply for tax relief is more restricted. This change will have the biggest impact on early-stage companies, which are often most in need of R&D tax relief. This is very concerning. From Leyton’s vast experience of engaging with small and medium-sized businesses across the UK, we know that R&D tax reliefs are still not widely understood (indeed, HMRC’s recent figures show most R&D expenditure (67%) was claimed by companies under the RDEC scheme) and we expect that many SMEs conducting R&D will miss out on the tax credits to which they are entitled.

Leyton strongly agrees that reform is needed to prevent the misuse of the R&D tax relief. However, instead of reducing abusive claims, the requirement to pre-notify claims is more likely to present an unnecessary barrier to businesses that are conducting genuine R&D from claiming tax relief. Beyond reducing funding for individual R&D projects, the change is counterproductive to the government’s strategy to boost productivity and economic growth in the UK. While we agree that R&D investment should be forward-looking, the immediate impact of this administrative burden will be detrimental to SMEs (particularly at the cusp of a widely-anticipated recession).

We have made the case before that a more effective way to reduce abuse of the scheme would be to enforce formal regulatory requirements or create a more informal code of conduct, such as the existing Professional Conduct in Relation to Taxation (PCRT), for providers.

Make sure to download our quick and easy to read fact sheet now.