In a significant development for the media sector, HMRC has intensified its scrutiny of research and development (R&D) tax relief claims. A recent survey by RSM UK highlights that three out of four R&D claims from media companies are being questioned by HMRC, reflecting a sector-wide challenge in accessing these vital reliefs.
RSM UK's survey reveals that 40% of media firms have made R&D claims, with only 24% being approved without dispute in the last year. A third of the claims were eventually approved after initial challenges, while another third were outright refused. This contrasts sharply with the overall rate of R&D claims being challenged, which stands at around 20%, highlighting the unique difficulties the media sector faces.
Impact on the media sector
The media sector encompasses various industries, including audio, music, film and TV companies, marketing and advertising agencies, publishers, and gaming companies. The increased scrutiny has significant implications for these businesses, which rely on R&D tax reliefs to foster innovation and growth.
In the 2021/22 tax year, 90,315 R&D claims across all sectors resulted in £7.6 billion in tax reliefs. However, the media sector's claims are notably fewer in number and value. For instance, the entire arts, recreation, and recreation sector had less than 1,000 R&D claims, amounting to approximately £100 million, compared to the manufacturing sector's 21,000 claims and over £1.5bn in reliefs.
Expert commentary
Constantine Costas, Tax Partner at RSM UK, expressed concern over the survey findings:
"This research is concerning as it suggests media businesses are struggling to make successful claims for research and development tax reliefs. These reliefs provide a vital lifeline to encourage businesses to develop new innovative technologies, which benefit their customers, their businesses, and the media industry."
Costas also highlighted the broader impact of reduced credit relief and the protracted enquiry process on the UK media industry's competitiveness. He called for a more focused and efficient enquiry process and increased awareness of available support to encourage innovation and enhance the sector's competitiveness.
The importance of R&D tax reliefs
R&D tax reliefs are designed to support companies working on innovative projects in science and technology. HMRC administers two main schemes: one aimed at small and medium-sized enterprises (SMEs) and the R&D Expenditure Credit (RDEC) scheme for large companies. Projects must aim to advance science or technology and address significant uncertainties to qualify.
The survey revealed that 95% of media businesses had claimed tax relief. Almost half (46%) claimed creative sector reliefs, while 35% used the Patent Box to offset groundbreaking research and development costs. This demonstrates the sector's heavy reliance on these incentives to drive innovation and growth.
Future outlook
The reduced credit rate under the new merged R&D tax incentive regime challenges the UK's competitiveness, particularly against countries like Ireland, which offers a 30% R&D credit relief compared to the UK's 15%. Costas concluded, "Making an R&D claim is more complex than ever, so seeking support from a trusted advisor with appropriate credentials is key to ensuring successful current and future claims."
To improve the chances of successful R&D claims, media businesses are advised to:
- Check the credentials and qualifications of their advisors.
- HMRC can still enquire into and decline claims even after initial processing.
- Seek a second opinion if uncertain about their application.
- Fully understand the rules around claiming, with more information on the UK Government's website under 'Claiming Research & Development (R&D) Tax Reliefs'.
The HMRC's increased scrutiny of R&D claims in the media sector underscores the need for businesses to seek expert advice and ensure compliance with the relevant guidelines. As the industry navigates these challenges, it remains crucial for the Government to streamline the enquiry process and enhance support to sustain innovation and competitiveness in the UK media sector.
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