IMPROVING ACCESS TO R&D TAX CREDITS FOR SMALL BUSINESS

Transcription

1 IMPROVING ACCESS TO R&D TAX CREDITS FOR SMALL BUSINESS Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document Improving access to R&D tax credits for small business (the Consultation) that was published by HMRC on 16 January We very much welcome the fact that the Consultation is taking place during Stage 1 of the process. 1.3 We respond in section 2 below to those specific Consultation questions where we believe that we can contribute most usefully to the debate. 2 Response to Consultation Questions Our comments in this section follow the order and numbering of the Consultation questions. As indicated above, we are only replying to some of the questions. 2.1 Do you agree that awareness, design, understanding and administration are the most relevant factors in ensuring that small businesses can access R&D tax credits? Yes. We think that all four factors are key to small businesses understanding the potential relevance for them of R&D tax credits. 2.2 Q2. How can HMRC better engage businesses to help increase take-up of R&D tax credits? a) How could businesses best obtain information on tax reliefs (social or traditional media, trade bodies, agents, other sources of information)? We think that it is appropriate to try all available media forms. There is no single best form. b) Who, within a company, should we target with information? (finance, R&D managers, the business owner, agents, others)? We think that all of the identified parties have a potential relevance. It is, however, essential to tailor the messages appropriately. We note that the question refers to the targeting of information to those within a company. In relation to the whole question of access to R&D tax credits for smaller companies, we think that a key responsibility must lie with the tax advisers of those companies. They should be the Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 people best placed to identify the scope for an R&D claim. Many undoubtedly fulfil that expectation but the experience of our members (particularly when taking over instructions to act for a business) suggests that there significant pockets of ignorance about R&D within the agent community. In order to maximise the potential of any HMRC initiative to engage more directly with businesses, it may well be essential to first provide agents with the opportunity to learn, revise or update their understanding about R&D tax credits. There is a confidence issue here. An agent without experience of R&D claims may be reluctant to introduce discussion on the subject with a client because of the risk that after raising client expectations and spending time in considering the potential for a claim, they then have to advise their client that no claim is appropriate. The matter is not helped for such an agent by the existence of self-professed R&D experts whose interests are served by vesting R&D claims with an air of mystique which suggests that the subject is too rarefied for a general tax adviser. [We note in passing that even for the competent general tax practitioner, boutique R&D specialists already represent a threat. Care will be needed in any HMRC initiatives to increase the take-up of R&D tax credits not to make incumbent agents feel that they are the subject of a pincer movement with their client relationship being threatened by both the boutique operators and HMRC.] With an improvement in agent confidence and the availability of advance assurance (as proposed), it should be possible for the cost (in both cash and time terms) of preparing an R&D claiming to be more controlled a positive point for both the claimant company and their adviser. Collaborative working between the company, their agent and HMRC seems to be the key factor here. Some of our members are engaged in the boutique movement and it is appropriate to recognise the positive role that they play in relation to R&D tax credits. Their identification of the potential for retrospective claims does fulfil a useful role in kick-starting a company s awareness of R&D relief. It also has the secondary effect of prompting companies to ask their incumbent advisers about R&D. In the context of retrospective claims (whichever agent is assisting a company), the existing two-year time limit for claims has the potential to work to the particular disadvantage of companies with lower levels of eligible expenditure as the work required to support a claim for two years of expenditure in unlikely to be significantly less than the work required to support a claim for (say) four years but the tax saving from just two years may be insufficient to justify the investment of the time to make the claim. We do of course appreciate that putting claims for R&D tax credits on a similar basis as claims for capital allowances would require legislative change but we thought we should draw attention to this statutory discouragement to claims. c) What is the right time for a business to receive information? There is probably no single right time. Information received at or around the time that a company is thinking about its tax liabilities, its results for a year or its budgeting could all be relevant. In addition to such recurrent right times, we think there is a case for: Including a facility either on or with Form CT41G to enable a newly active limited company to request information about R&D tax credits. In addition to advising HMRC of the company s potential interest in the subject, it would serve as a useful reminder to any agent to introduce brief discussion of R&D when dealing with the initial paperwork. The provision by HMRC to a company and their agent of a general Welcome to R&D pack upon a company s initial allocation to an R&D Unit which would include relevant contact details and information about advance assurance. P/ATTTSG/Submissions/2015 2

3 Exploring the possibility of automatic identification of potential R&D claimants by reference to trade classification, key words, patterns of expenditure, etc. d) What other promotional activities could be introduced to ensure maximum take up of the reliefs? We think that R&D workshops staged for example on industrial estates (rather than in hotels or HMRC offices) with invitees restricted to representatives of locals businesses and the existing agents of those particular businesses could usefully demonstrate HMRC s enthusiasm to encourage take-up of R&D claims. At the same time, it would reduce the possible concern on the part of agents that direct contact between their clients and HMRC on R&D could confuse and potentially undermine the client relationship. e) Do you consider that HMRC works sufficiently well in partnership with other government agencies? If not why? Section 3.5 of the Consultation states: Information HMRC provided via its free business support service pointed 45,000 small businesses to the Business is GREAT Britain webpages in one day, all seeking further information about claiming for tax reliefs. We think this refers to an that was addressed Hello Employer and headed Tax reliefs can help businesses save money. The information on the reliefs in question was on the BIS GREAT website. The link in the led to a page with onward links to 14 different reliefs and incentives. Research and development tax credits was the tenth item in that list. Although the item had clearly been updated, the GOV.UK webpage showed it to have been published on 1 January We appreciate that the was a genuine effort to promote a number of disparate reliefs and incentives but its misleading suggestion that it was intended for employers, the diverse range of subjects dealt with, the absence of a consistent branding between items and the misleading date on the R&D page were in our opinion, unlikely to have as positive an impact as a focused targeting of businesses in certain trade classifications or whose accounts suggested that their activities might include elements of R&D. We appreciate that such specific targeting would have required the investment of more resources but we think it is important to avoid poorly targeted educational campaigns which serve little real purpose. f) Are there any models of good practice we might follow (eg in other countries)? We cannot respond to this question. 2.3 Q3. Are you confident that you can contact the right R&D Unit if you need to do so? We note that the Further Information section of the GOV.UK page referred to in Q2(e) above leads to CIRD80350 without also referring CIRD80360 which is the page that actually shows how postcodes are allocated to the five R&S Specialist Units. One of our members has asked whether the use of the centralised Glasgow PO address for HMRC correspondence is contributing to the confusion as to which R&D Unit to contact. 2.4 Q4 Is the current definition of R&D a barrier to small companies claiming R&D tax credits? a) Would a change in definition to align it to accounting practice simplify the rules? If so why? What alternatives might be better? b) If introduced, how far should this treatment be optional (say, for companies below a certain size) or should it be compulsory? c) What can we learn from other countries? P/ATTTSG/Submissions/2015 3

4 We are doubtful whether aligning definitions with accounting practice would increase the take-up of R&D relief. Businesses would still be dependent on their advisers or HMRC to know whether expenditure qualified. We would be concerned that any change in definition might add complexity to the R&D tax code particularly in relation to transitional provisions. Any change or option should only be introduced if it offered genuine and enduring simplification for its users. In order to avoid having to change the accounting treatment of R&D expenditure incurred by smaller companies (if definitions were to be aligned with accounting practice), we would go so far as to say that smaller businesses as defined for Companies Act purposes should specifically not be required to align R&D tax credit claims with accounting treatment. That would perpetuate the ongoing requirement for a separate definition of what constitutes R&D for tax purposes and add complexity rather than simplify matters. We accordingly favour the retention of the present definitions albeit with additional appropriate guidance. 2.5 Q5. Are the rules over which costs qualify for relief a barrier to small companies claiming R&D tax credits? We think that the subcontractor rules and the definition of qualifying indirect activities may be offputting. 2.6 Q6. Are there other specific design features which could be simplified to help small companies? Please see our response to Q5 above. 2.7 Q7. If overall changes or improvements can be identified, would they be better as options or changes to the general rules, or as a particular scheme aimed at the smallest companies? Unless a decision was taken to have a genuinely simplified and free-standing scheme for small companies, we would favour changes to the general rules as options might complicate matters and reduce understanding. 2.8 Q8. Recognising that the R&D manual is used by different groups, what works well/ less well and for whom with the current format? In general, we see the R&D manual as working well for HMRC staff (its intended users) and tax agents with a specialist knowledge in the subject. Outside of these two groups of users, we would not expect readers to find the manual very accessible. That comment is not unique to the R&D manual. The HMRC manuals were not designed for the lay reader. 2.9 Q9. Is dedicated external customer (rather than intermediary) guidance needed? If so, does the commercial market already provide what is needed? As a professional body whose members are intermediaries, we are not best placed to answer this question. We do, however, offer the following comments: It is probably no more necessary for someone in business to understand the detailed working of R&D tax credits as it is for them to understand the detailed working of (say) capital allowances. There is already an abundance of information available on R&D tax credits but some of it is too detailed, some of it is designed to achieve a sale of expert advice and some of it focuses unduly on big ticket boffins in white coats projects. What might be needed is a resource that enables the reader to get a feel for the subject and then drill down into more specific questions. In this context, it is useful to compare GOV.UK s opening webpage on R&D ( and the opening webpage for Capital Allowances ( which is significantly less overwhelming. P/ATTTSG/Submissions/2015 4

5 There are some commercial websites that aim to provide a general introduction to R&D without being overtly focused on selling advisory services. An example which we came across in the course of preparing this response (and with which this Association has no connection) can be found at: Without endorsing its content, we commend its practical approach, business focus, user-friendly examples and accessible language Q10. Should HMRC design its guidance by task or event rather than around the detail of the legislation? We do not think that HMRC s detailed guidance (as provided in the R&D manual) requires redesigning. In relation to any introductory material for the lay reader, we are uncertain whether the question is relevant. What we are more certain of is that the GOV.UK webpage (as referred to in the third bullet in Q9 above) is less likely to leave the reader thinking that R&D credits might be relevant for their business than the comparable commercial version (to which we refer in the fourth bullet in Q9 above). Checklists, flowcharts and examples (including those smaller and more down to earth qualifying projects such as advances in a process as distinct from the creation of a tangible product) all have a part to play in helping smaller companies and their agents identify the possible relevance of R&D tax credits. It is, however, essential that such aids do not then assume a greater significance such that they are seen as the determining factors as to whether relief is available. We think that greater prominence should be given in the guidance to what constitutes an advance in science or technology. Paragraphs 9 of the BIS Guidelines (as set out in CIRD81900) provides a good starting point but could usefully be developed with some examples. It states: 9.A project which seeks to, for example: a.extend overall knowledge or capability in a field of science or technology; or b.create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or c.make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or d.use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product that has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner), will therefore be R&D Q11. What are the top issues for small companies and intermediaries both in terms of the legislation/rules and procedures? We suggest that they include: Certainty Cost Absence of adverse come-back (for example following a tax compliance check). Small companies in particular do not wish to become the subject of an HMRC enquiry. This can mean that they might prefer to forego making a legitimate R&D claim rather than risk having to commit time to responding to an enquiry. If they could be certain that the P/ATTTSG/Submissions/2015 5

6 relevant questions had all been addressed to HMRC satisfaction in advance of the claim, they might well feel significantly more comfortable about claiming Q12. Who uses the current guidance: companies, intermediaries or both? In particular, who uses the: material currently on GOV.UK s site We are unable to respond to this question. HMRC manual Please see our response to Q8 above Q13. How would companies and intermediaries prefer guidance to be set out? Alternatives could include: in the current format as a manual; additional illustrations/ case study, Q&A, decision tree etc via online forums: webinars/ YouTube etc embedded in rules based applications (accounting software)? Please see our responses to Q9 and Q10 above Q14. Would the approach set out above improve take-up of R&D tax credits amongst firms who have never made a claim? We have no evidence base from which to answer this question Q15. We would welcome views on the design of the advance assurance service including: The companies that would benefit most (ie in encouraging them to carry out more R&D and grow faster); What specific issues do companies encounter in making their first claim? For how long an advance assurance should be valid? Whether your company (or a company you advise) would be likely to use advance assurances (and if not, why not)? Any issues for particular sectors/ types of company in administering and designing advanced assurance? How the service should be advertised? Rather than answer the specific sub-questions above, we would like to set out our vision of how companies might best be encouraged to navigate the R&D legislation and administrative procedures. If a small company is intending to claim R&D tax credits for the first time (either in absolute terms or in terms of a particular type of project), we think that it should to be able to seek the assistance of an HMRC R&D pilot. The claimant company would remain responsible for the claim but it (or its advisers) would be able to place reliance on the advice received from the HMRC pilot in terms of the both the eligibility and quantification of the claim provided that all relevant information had been given to the pilot. So long as all relevant information had been provided to the pilot in good faith, the claim could not be the subject of an enquiry. In effect, the pilot would have satisfied her/himself of the company s entitlement to the R&D credit in advance of the claim. P/ATTTSG/Submissions/2015 6

7 We see such a facility as the most comprehensive ways of addressing the issues identified in our response to Q11 above. We recognise that our suggestion has resource implications for HMRC but we see it as the logical fulfilment of the Government s commitment to an advance assurance service. Whilst it might be possible to design a service that made less demand on resources, we are doubtful whether anything short of such a piloting facility would do much to encourage either small companies or their advisers to explore the practicalities of claiming R&D tax credits Q16. Another way to improve administration might be to link the advanced assurance service with access to finance. When attracting finance for an R&D project, how is this ability influenced by R&D tax credits? How could an advanced assurances service be structured to support access to funding? We think that this would depend very much on the extent to which reliance could be placed on the advance assurance. Our suggestion of a pilot service (see Q15 above) would give a high level of confidence that a claim would not be challenged. However, linking advance assurance with access to finance might require HMRC to commit to a particular treatment of expenditure in advance of that expenditure being incurred. We are unclear whether consideration has been given to that possibility. On the question of finance, we think that the inter-relationship (and mutual exclusivity) of grant claims and R&D relief is a complicating factor. Clear guidance on this could be very useful Q17. Are there any specific aspects of the way which a claim is made or processed which could be simplified or improved? We are not responding to this point Q18. Do you agree with the impact assessment? In particular do you think that changes to the R&D tax credits could have any equalities impacts? We are not responding to this point. 3 Summary 3.1 We have responded in section 2 to the detailed questions. Their diverse and detailed nature makes it inappropriate to seek to summarise this response. 4 Contact details 4.1 We would be pleased to join in any discussion with HMRC in relation to the Consultation proposals. Should you wish to discuss any aspect of this response, please contact our relevant Technical Officer, Will Silsby, on or at: wsilsby@att.org.uk P/ATTTSG/Submissions/2015 7

8 Yours sincerely Paul Hill Chairman, ATT Technical Committee 5 Note 5.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,500 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2015 8