Understanding intra-group transfers: filing R&D claims with HMRC

Introduction

R&D tax credit claims usually require the claimant company to be a going concern. This means the company must be financially stable and expected to continue operating in the foreseeable future. The definition of a going concern is based on accounting standards and publicly available financial statements. This requirement was designed to prevent HMRC from paying out R&D credits to companies that are otherwise insolvent. It had long been recognised that there was an issue whereby an intra-group transfer of trade technically rendered the transferor company a ‘non-going concern’ from an accounting perspective and technically precluded an R&D claim. This was the case even though the company was actually solvent and not a genuine target of the ‘going concern’ requirement.

Legislative changes for intra-group transfers

To address this anomaly, a change in the legislation was introduced for accounting periods commencing on or after 1 April 2023. This change exempted intra-group transfers of trade from the going concern requirement.

However, having reviewed a live case in recent months, we have identified that the legislation does not always achieve the intended result. The issue appears to be that the exemption is only given at the point where there is a relevant group transfer in the same period as the R&D claim. Accounting standards require that a company files accounts on a non-going concern basis where the trade is transferred after the year end but before the accounts are signed. This minor change in fact pattern would appear to render the company ineligible for the exemption at that point in time despite it being a scenario where the exemption was intended to apply. The legislation also appears to refer to ‘accounting periods’ when it might more sensibly refer to ‘periods of account’.

Current developments

We have shared our concerns with the Chartered Institute of Taxation who raised the matter with HMRC. HMRC has acknowledged there is an issue with the legislation which prevents it from achieving its intended objective in certain situations and intend to update their Manuals shortly.

Possible interim solutions for intra-group transfers

Whilst we currently do not know what the update to the HMRC manuals will say, whether HMRC will ‘take the point’ in practice or whether HM Treasury will bring forwards legislation to correct the anomaly, there may be some possible ‘work around solutions’ in the interim:

• Extend the period of account to longer than twelve months to incorporate the ‘relevant group transfer’
• Submit the earlier R&D claim after Companies House publishes the accounts for the later period in which the relevant group transfer takes place.
• File the R&D claim and signed accounts with HMRC and ensure this is processed before the accounts are publicly filed at Companies House.

Conclusion

Whilst HM Treasury introduced this exemption to address an anomaly with the pre-existing legislation, it would appear another anomaly has been created. Uncertainty around R&D eligibility will persist for many intra-group transfers until the legislation is properly addressed.

For more information, visit this Chartered Institute of Taxation’s article.