Writing for Business Advice, co-founder of GrantTree and resident grants expert Daniel Tenner takes a closer look at the implications of the government’s new Advance Assurance process on R&D tax credits for small firms.
In his Autumn Statement last November, chancellor George Osborne announced the new Advance Assurance process, which is intended to help remove some barriers that prevent small companies from filing R&D tax credits, such as confidence the claim will actually go through.
On paper, it sounds like a perfect shortcut dreamed up for the hundreds of companies which struggle to jump through the R&D hoops to file a claim. However, to paraphrase a famous proverb: “The road to easy R&D tax credit filing is paved with good intentions.”
A little background on Advance Assurance: it is a scheme run by HMRC open to small companies which have either undertaken R&D or have completed it for other companies. Companies which are eligible must not have claimed R&D tax credits before, must have less than 50 employees and a turnover of £2m or less.
It acts as it is branded: to provide assurance in advance that “for the first three accounting periods of claiming for R&D tax relief, HMRC will allow the claim without further enquiries”. In layman’s terms, this means that you can submit your first three R&D tax credit claims and HMRC will not enquire into them.
This may sound too good to be true to many readers and they would be right – the devil is in the detail when it comes to Advance Assurance. While no exact details of Advance Assurance have been released yet, we will take an educated guess that it will run similar to this: before submitting your first three R&D tax credit claims, you would apply for a certification from HMRC for Advance Assurance, giving details about your R&D spend, what kind of R&D you are undertaking, etc.
HMRC would then supply it to you, on the understanding that you remain in the brackets you have previously outlined to qualify for Advance Assurance (type of R&D, amount spent on it etc.). If you fall outside of these brackets (which is probable in a small company where you may spend the first year developing an app, and then the following year you could be scaling it and spending more, or you could pivot to something else entirely), HMRC will likely reserve the right to enquire into your application and reject it anyway.
The Seed Enterprise Investment Scheme (SEIS) also offers its own Advance Assurance process. Unfortunately, the reality is that the only SEIS assurance you really receive is that you haven’t been rejected yet. HMRC cannot legally offer a“guaranteed” yes in advance – it can only offer a “we can’t see a reason to say no yet” compromise.
Although HMRC is undoubtedly well-intentioned, Advance Assurance does not solve the underlying barrier of R&D tax credits, because you can still have your claims enquired into after or during the three initial claims. With the SEIS application, we advise our clients to submit as much potentially disqualifying information as possible, because the only clear signal you can ever get from Advance Assurance is a “no”. A “yes” is always conditional on there being no new disqualifying conditions emerging later. HMRC can always claw back relief up to seven years back.
It is clear that HMRC intend Advance Assurance to simplify a convoluted and confusing process (for an example of all the steps in filing, click here) and are trying to make the application less risky. They are offering to supply “an HMRC specialist to help you understand and comply with the R&D tax relief conditions,” but even this may fall short of making the process run smoothly. The specialists at HMRC have different priorities to those who actually run the company claiming the R&D relief. The focus of HMRC is to ensure the claim adheres to the ever-shifting framework of R&D claimable expenses, rather than identifying the potential claimable costs and maximising the claim – as an R&D specialist like GrantTree would.
On top of this, much of the R&D legislation is grey and open to interpretation; for example we have had some HMRC inspectors easily agree that software development is a claimable expense, but another client was pulled up by a different inspector who said software development only qualified for R&D relief if “every line of code could be shown to be impossible to derive using existing methods of software development”. Which of these inspectors would you want to help you to prepare your claim?
You may think this is a strong reaction to such a well-intentioned product from HMRC, but as claiming R&D tax credits is subjective in its nature, it is hard to see how HMRC can guarantee (or “assure”) that an SME’s claim will go through, especially as R&D is always in a state of fluidity. Although it has offered up a specialist of its own to take companies through the process, there is a fundamental difference in what each party wants out of the process – the inspector will want a claim that adheres to their personal interpretation of HMRC’s guidelines, and the company claiming will want a maximised submission, which also sticks to HMRC’s guidelines – but to the most friendly and generous interpretation achievable.
The best way to navigate through this complicated process is to draw on the experience of the R&D tax credits specialists out there – many of whom will be happy to have a free qualifying call to chat about your R&D expenditure. That specialist might be us or it might be another provider but when it comes to Advance Assurance, remember to get more than just one inspector’s opinion on your claim if you want to get the most out of the process.
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