There is some confusion over how HMRC uses set-off when paying out Research and Development Tax Credits. Andrew Alton, tax accountant at SME R&D, guides company directors through a complex process

Author: Andrew Alton, Tax Specialist at SME R&D
Author: Andrew Alton, Tax Specialist at SME R&D
SME R&D Tax Credits

Rocking Horse Group (UK) has recently made us aware of a number of companies who have been disappointed to receive a smaller R&D tax credit than expected as HMRC has set the tax credit off against the company’s outstanding liabilities.

Whether or not the tax credit is paid in full, or off-set, depends upon the specific circumstances and the tax heading of the outstanding liability.

For example, before paying a Research and Development Expenditure Credit (RDEC), HMRC are required by law to consider whether the company has outstanding liabilities owing to HMRC, and if so, to off-set the tax credit against these. This consideration is built into HMRC’s review process and HMRC has no power or discretion to disregard the legislation on this point.

Where a company has an agreement with HMRC to defer tax under their Time to Pay (TTP) service, HMRC will maintain their current policy and set off any RDEC or payable R&D tax credit against any TPP liability. This would include not just the liability owing at the time the credit is dealt with and could include informal deferrals offered in advance of TTP arrangements being put in place.

HMRC has confirmed that if a company took advantage of the ability to defer a VAT liability between 20 March to 30 June 2020, then the VAT deferred will not be recognised as a current liability owing to HMRC before the revised due date and any claim to RDEC or payable R&D tax credit will be paid in full.

However, any VAT liabilities arising outside of this period, even if under a TTP arrangement, will be considered as owing and therefore any tax credit set off against them.

HMRC has announced that there will be a new VAT deferral scheme introduced in 2021, the details of which have yet to be released. Where this allows the company to pay the amounts due by a revised date or dates, then any claim to RDEC or payable R&D tax credit will be paid in full providing these dates are yet to occur.

For other liabilities, HMRC has the authority to set-off amounts that are due to be repaid to a company against debts owed to HMRC by that company. HMRC do not need to ask the company before doing this but they must advise the company of the set-off in writing. HMRC will consider the particular circumstances of the customer on a case-by-case basis if the company objects to the credit being set-off against other liabilities. Clearly if asking HMRC to consider not setting off against outstanding liabilities then it would be wise to advise them that the company would prefer them not to do this and the reasons why they should consider this at the time of making the R&D claim. The statute is to prevent HMRC paying out a credit with one hand and having to take collection action with the other.

There are other circumstances where a Research and Development tax credit may not be received as expected. For example, if an enquiry is opened then HMRC may withhold the credit until the resolution of that enquiry. In this scenario it is possible that HMRC may consider part payment of the credit if parts of the claim are agreed.

It should also be noted that this has been a very unusual year for everyone including HMRC. Many HMRC staff have been working remotely or taking on roles that they are not totally familiar with. Accordingly, there may be circumstances where not everything has been done as above and some have received their research and development tax credit whereas others have not.

If this is of interest get in touch via email or our website.

Andrew Alton

As ex-HMRC Tax Specialists SME R&D have the experience and knowledge to ensure our clients receive the maximum benefit from their R&D claims whilst minimising the risk of enquiry. Equally, if you have encountered difficulties with your current R&D claim, then we are happy to assist companies through to the conclusion of your dealings with HMRC.

SME R&D Tax Credits

Rocking Horse Group provides advance funding to SMEs against their R&D Tax Credit and Innovate UK grants, enabling small dynamic UK enterprises to pursue their R&D and accelerate their growth.

If this is of interest get in touch with:
Xavier Van Hove
or James Davis