HMRC consultation on wider use of Advance Assurance for R&D tax reliefs

In the Government’s Spring Statement, the Chancellor announced a new consultation into the wider use of advance assurance in the R&D tax relief regime. This area of tax legislation has been under heightened scrutiny in recent years, with widespread compliance efforts that HMRC estimates have reduced error and fraud in claims from 17.6% in 2021-22 to 7.8% in 2022-23. However, take-up of advance assurance has been low, so what are HMRC considering to encourage more applicants? 

What is Advance Assurance?

Advance assurance is a voluntary scheme introduced by HMRC in 2015 to provide greater clarity to new R&D claimants. Put simply, it tells them whether or not they’re eligible for tax relief. The scheme’s aim is to provide greater clarity and certainty for claimant companies on the status of their R&D activities, and it applies for the first three years of claims. It’s open to smaller companies who haven’t previously claimed R&D tax relief – those with a turnover of less than £2 million, and with under 50 employees.

How does Advance Assurance work?

Advance assurance follows this simple process:

• Applicants send details of their R&D activities to HMRC, along with some other company information.
   
• HMRC conducts a call with the company to discuss the projects in more detail.
   
• HMRC issues a letter stating whether or not the application was successful.
      

If the company is granted advance assurance, then HMRC will agree to accept the first three years of R&D claims, provided the claim doesn’t differ from this application. They do, however, reserve the right to enquire into the claim if they believe it falls outside the scope of the original assurance application.

If the advance assurance is not granted, the company can still make a claim for R&D tax relief, although this may be subject to heightened scrutiny.

HMRC Wants Wider Take-Up

Advance assurance may sound like an attractive proposition to companies. Provided the application is an accurate reflection of R&D activities they’ve already undertaken and planned, it should protect them against enquiries for the first three claims. However, take-up of the scheme has been low and continues to decline, with just 80 applications received in 2023-24 out of a total of around 11,500 eligible companies (source: Gov.uk “R&D tax relief advance clearances”).

In response to this, and as part of wider recent reforms to R&D tax relief legislation, HMRC launched a consultation which ran until 26 May on how take-up of the scheme could be widened. They believe that the current voluntary regime, combined with low take-up, creates uncertainty for claimant companies at the point they make investment decisions – and that it doesn’t guarantee that a non-qualifying project can be screened out before investment is made (although advance assurance requires R&D to have already taken place).

Make It Mandatory?

The first question they’re considering is whether advance assurance should be voluntary or mandatory.

The advantage of voluntary assurance is that it places no additional burden on companies that don’t wish to enter the scheme. However, there’s an obvious problem: a voluntary scheme is likely to be self-selecting. Those with genuine R&D will be more inclined to apply, whereas those with incorrect claims will not make the voluntary disclosure in the hope that their claim goes unnoticed.

(Interestingly, HMRC also states that there may be circumstances in which voluntary assurance could be provided as a paid-for service, although this has raised further concerns about whether taxpayers should be paying an additional fee for such a service.)

The alternative is mandatory assurances. These would likely better address non-compliance, but would put a greater burden on businesses and HMRC, who concede that full advance assurance for all claimants isn’t possible with their current resources. But if advance assurance is to be mandatory, who should it be mandatory (and available) for?

Widen It Beyond First-Time Claimants?

Another option is to widen the scheme beyond first-time claimants. The Government believes many smaller companies may still experience uncertainty later. To make a wider service more feasible, they’ve considered reintroducing a minimum spend for R&D claims, last seen in 2012. The idea of this is that expenditure of less than £25,000 is unlikely to be pushing the boundaries of science and technology. This may unfairly impact smaller, owner-managed businesses the most, where sole directors are claiming dividends and nominal salaries, creating levels of expenditure that don’t fully reflect the work carried out.

When Should It Be Required?

The next consideration is when advance assurance should be required. Should it be:

1. Before an R&D activity begins or when it’s recently begun (“pre-activity”)?
2. When activity is well underway, but before the claim is made (“pre-claim”)?
3. When a claim is made, but before payment?

Pre-activity assurance would need to be a less formal process, as HMRC concedes the company will know less about their R&D activities. The argument against this is that the company may simply not know whether its work is likely to involve R&D activity.

Pre-claim assurance is closest to the current service. The company would have a greater understanding of their project and what advances and scientific or technological uncertainties have been involved. HMRC acknowledges that its priority here is higher-risk claims to target error and fraud.

Pre-payment assurance would possibly involve companies requesting that any post-claim checks are made before payment is issued, effectively holding payment until HMRC is satisfied the claim meets legislative requirements. While this provides certainty for companies, it does create a delay in receipt of payment, and again possibly harms those making genuine claims, who are caught in the requirement to receive assurance before their repayment is issued.

It’s clear that there’s no aim to introduce mandatory advance assurance for all, given the burden this would place on businesses and HMRC, but the intention of widening the use of this programme is to better target error and fraud. It remains to be seen how HMRC designs this to target businesses they believe are most likely to be the subject of erroneous claims when their responses to the consultation are published later in the year.

If you’d like to discuss any of the topics mentioned in this article, or have any related queries, please get in touch with our team via email at taxmarketinguk@markel.com

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