Is it time to overhaul the R&D Advance Assurance scheme?

HACKNEY, U.K. - Amzeal -- New figures obtained under the Freedom of Information Act by research and development (R&D) tax enquiry defence firm Avalon Tax reveal that HMRC's R&D Advance Assurance scheme is being vastly underutilised.

Introduced in 2015, the scheme aims to give small and medium-sized enterprises (SMEs) confidence that their first three years of R&D tax relief claims will be accepted by HMRC without challenge or enquiry, provided there are no significant changes to the agreed activities. Eligible companies apply online, detailing their R&D activities, and, if approved, they are granted Advance Assurance by HMRC for three years. However, uptake has been remarkably low.

Avalon Tax's findings show a steady decline in Advance Assurance applications: from 205 in 2018/19 to 159 in 2019/20, 154 in 2020/21, 120 in 2021/22, 105 in 2022/23 to just 86 in 2023/24, representing a mere 0.1% of all R&D claims made in 2021/22. Approval rates have also dropped sharply, from 68% in 2019/20 to just 29% in 2023/24.

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Jonathan Yeomans, CEO of Avalon Tax and a former senior HMRC tax inspector, argues that the scheme's narrow criteria and lack of promotion have contributed to its lacklustre uptake. "The scheme is not widely advertised by HMRC and has very narrow criteria for who can apply. The figures we have obtained show that HMRC's approach has shifted dramatically from approving the majority of applications to now rejecting most Advance Assurance applications. Regrettably, this means that engagement is now almost negligible," he said.

Given this, Jonathan Yeomans suggests a comprehensive reform of the scheme to broaden access to Advance Assurance, proposing it be extended to all first-time R&D tax relief claimants, regardless of size. Currently, the scheme is limited to SMEs with a turnover below £2 million and fewer than 50 employees, and only those who have not previously claimed R&D tax reliefs.

The R&D tax scheme paid out £7.7 billion in 2023/24. Expanding the scheme to include all first-time claimants could help HMRC avoid non-qualifying claims and ensure that businesses of all sizes have the opportunity to innovate with confidence. A more inclusive approach could also reduce uncertainty and risk for first-time claimants, fostering compliance and transparency while supporting innovation and growth.

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There is also a strong case for making Advance Assurance a mandatory process for all R&D tax relief claimants. With R&D error and fraud estimated to have cost £1.1 billion in 2022/23, a more rigorous approval process could help identify non-qualifying claims before any funds are disbursed, saving resources and protecting businesses from the financial strain of a possible later clawback following an HMRC R&D tax enquiry.

Currently, HMRC has over 500 officers engaged in tackling R&D tax compliance at the tail end of the process, very often long after a payment has been made. By shifting more of these resources to the start of the process, HMRC could ensure that only qualifying R&D claims are approved before payment, preventing errors and reducing the need for costly recoveries, and aligning the UK with international best practices seen in countries like Australia, Canada, and France, where pre-claim R&D tax relief assessments provide greater certainty and compliance.

As the UK moves towards a situation where companies of all sizes will claim under the same new merged R&D tax scheme, effective from 1 April 2024, Avalon Tax argues that now is also the time to consider R&D "Advance Assurance for all". A more robust and inclusive scheme could not only bolster the UK's competitiveness but also reduce R&D tax relief error and fraud and help ensure that public funds are only used more effectively to support genuine innovation.