21. 05. 2024

Pitfalls of HMRC R&D advanced notification rules

Pitfalls of HMRC R&D advanced notification rules

Companies claiming research and development (R&D) tax relief need to submit details in advance making it harder to backdate claims.

Last year, HMRC introduced a requirement for companies to let them know in advance if they planned to make a claim for R&D tax relief.

This advanced notification rule applies to claim periods beginning on or after 1 April 2023, meaning that accountants now need to be familiar with the timing of when to notify HMRC. There are also some surprisingly complex rules around how and when a company might be exempt from notification.

While the concept of prenotification was challenged by a House of Lords committee, HMRC justified it as an important part of their efforts to increase overall compliance in the R&D scheme.

Their rationale was if they know where claims are going to come from, they can do more to work with companies before the claims are made – a concept known as ‘upstream compliance’.

However, we suspect a secondary motivation was to reduce the number of historical claims being submitted.

By restricting claims to only the most recent claim periods, claimants should have more accurate recollections of the projects. They are also more likely to be able to produce the appropriate documentation.

In a similar vein, it makes it harder for claimants to make back-dated claims for work they did previously without considering it to be R&D for tax purposes at the time.

In recent compliance checks and tribunals, and even in the rules of the new Merged R&D Scheme, it’s clear HMRC are now looking for intentional R&D projects.

In enquiries, they expect claimants to demonstrate that R&D projects were planned and documented all the way through and led by competent professionals who knew the work undertaken was an attempt to advance science or technology in their field of expertise.

Claim notification adds another way for HMRC to restrict R&D claims only to companies who are doing qualifying R&D ‘on purpose’.

When do claimants need to notify HMRC about an intended R&D claim?

If a company is planning to claim for R&D tax relief, they need to notify HMRC within a ‘claim notification window’ that runs from the first day of the period of account until six months after it ends.

So, if the period of account runs from 1 April 2023 - 31 March 2024, the notification needs to be submitted between 1 April 2023 and 30 September 2024.

However, the company does not need to notify if they have submitted a qualifying claim within three years of the end of the claim notification window. In our example, that three-year window would run from 1 October 2021 until 30 September 2024.

When does a previous claim qualify for the exemption to the rule?

Now, here’s where things get complicated. Finance Bill 2024 introduced a new clause, which said that not all claims within that three-year period are relevant when considering whether a company is exempt from notification.

So now, a claim only ‘counts’ within this three-year period if:

  • it is for a claim period beginning on or after 1 April 2023;
  • it was made in the original return; or
  • it was made by amendment but before 1 April 2023.

It is often hard to figure this out, and even harder to keep the rules fresh in your mind when speaking to clients. As such, you can use the free Prenotification Calculator we’ve put together to get an immediate answer to the following questions:

  • do I need to notify HMRC about this client’s claim?
  • what is the deadline for notification of this claim?

What about long periods of account?

There is an additional quirk you need to be aware of when you are dealing with a claim for a long period of account of more than 12 months.

For long periods of account, the claim needs to be split across two accounting periods and you will need to complete two Additional Information Forms and two CT600s.

The quirk is that you do not need to notify HMRC about the claim for one accounting period if the company has already made a claim or claim notification for the other accounting period within that long period of account.

For example, let’s say the long period of account runs from 1 April 2023 until 30 June 2024 (15 months). The first accounting period is 1 April 2023 – 31 March 2024 (12 months) and the second is 1 April 2024 – 30 June 2024 (three months).

If the company notifies HMRC about its intention to claim for the 12-month period, this means that it does not need to notify HMRC for the three-month period, despite the fact that it has never submitted a claim.

In summary

For companies who have been submitting claims regularly over the last few years, the new rule will have limited impact as they are likely to be exempt from notification on the basis of their previous claims.

However, if you are working with a client who is new to claiming, or who has not claimed in the last three or more years, understanding how claim notification works is going to be essential. If HMRC receive a claim without notification when the company wasn’t exempt, they will reject the claim entirely and with no grounds for appeal.

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