R&D tax relief – how to avoid the common pitfalls

Farming businesses set up as limited companies have been strongly encouraged over the past decade to claim research and development (R&D) tax relief, but the bar to qualify has now been set higher.

Recent reports about HMRC clamping down on the relief have highlighted issues with the system and prompted some to question if it is still worth pursuing.

Andy Grey, senior manager in the innovations relief team at accountancy firm PFK Francis Clark, says while R&D tax relief is now under much greater scrutiny than five years ago, it is still a valuable opportunity for genuine projects.

See also: IHT planning – beware of surprise tax liabilities

“If you feel you are genuinely involved in innovative work, then you should still be encouraged to make a claim. But be aware, it’s not a rinse and repeat of previous years – the benchmark has been raised,” he says.

R&D tax relief is designed to support companies across the whole economy, not just in agriculture, that are working on innovative projects in science and technology.

However, concerns have grown since 2020 over the escalating number of claims, many of which have proved to be non-compliant. This has prompted HMRC to take a tougher stance and carry out far more investigations.

A report published in 2023 by HMRC concluded that “many customers make mistakes while applying, and others abuse the generosity of R&D tax reliefs”.

Compliance issues

Of the 2,000 claims received in 2020-21 from small and medium-sized enterprises (SMEs) in the agriculture, fishing and forestry sectors, the report found that only 50% were fully compliant.

“HMRC kind of created the problem in the first place because it stopped inquiring into R&D claims, which meant the number of claims skyrocketed and the quality of those claims probably dropped too,” says Andy.

“It now carries out an inquiry into roughly one in five claims, whereas previously it was clearly less than 1%.”

Andy says while there are good advisers when it comes to claiming R&D tax relief, there have been some less reputable ones too, who have encouraged farmers to submit claims beyond what is reasonable.

“For a while, there were lots of agents running around pretty much saying ‘there’s lots of stuff you’re doing on farm you can claim for’, yet to my mind some of it wasn’t R&D at all.”

For example, while feed trials to test novel products or approaches have the potential to be a qualifying activity, Andy says he has seen claims where 80% of the feed used on the farm has been included, rather than just the amount used in the trial.

I’ve then asked the farmer ‘are you really using 80% of feed for the trial?’ and they say, ‘not really, but the adviser said it was fine to claim it’. I understand people do rely on the advice they are given, but farmers do need to take some accountability as well.”

Taking accountability

To address this issue, HMRC has now introduced a specific section on the claim form where the farmer has to personally declare that they are taking responsibility for the claim.

However, it is also important for farmers to carry out due diligence when choosing who they work with, says Andy.

There are companies which will help farmers prepare a claim on the basis of a contingency fee – which in itself is not a problem – but some, in the event of any inquiry from HMRC, will deal with only one round of correspondence before walking away.

“The farmer is then left to pick up the bill. Remember, if they are asked to repay the money to HMRC, the amount that needs to be returned will be the gross amount – inclusive of the contingency fee,” he says.

Check adviser’s reputation

“So ask yourself: does the adviser have a good reputation for making R&D claims? What support do they offer if an inquiry is opened? If you are feeling pressured by your adviser or accountant to include aspects in your claim that you aren’t comfortable with, it may be best to pause and seek a second opinion.

“If you’re uncertain about it, there’s probably a reason why.”

According to the HMRC guidance notes, to qualify for R&D relief, a project must seek to make an advance in a field of science or technology “by resolving scientific or technological uncertainty”.

Claims where a company may have made advances in science and technology, but not as part of a defined R&D project to resolve identified uncertainties, are not eligible.

Eligible projects

Projects must also aim to create an advance in the overall field – not just bring a commercial benefit to the business concerned. 

Andy warns there can be a misunderstanding that a farmer buying an advanced piece of machinery which will help them to do something novel can claim this as R&D.

“A machine might do something amazing, but that isn’t R&D. In that instance, the company who produced the machine is probably the one involved in the R&D and the farmer is just the customer.”