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R&D tax enquiries and the media sector – “It’s all about perception”

Author: Tom Mason

By Ryan Sian, Managing Director of randd uk

Recently published research from RSM has revealed that media firms are making significant amounts of R&D tax claims – but more than three quarters were disputed by HM Revenue & Customs (HMRC) in the last year.

40 per cent of media businesses, which cover sectors including marketing, communications, gaming, publishing, audio, music and film and television production, made an R&D tax claim in 2023/24. However, the media industry is struggling with a dispute rate that is four times higher than the total average of 20 per cent.

This hasn’t come as a surprise to R&D tax experts, although it is disappointing. It reveals that HMRC’s risk-based approach to assessing R&D tax claims is leading to doubt over the validity of claims from the media sector at far higher rates than faced in other sectors.

The question of media

The fundamental problem faced by claim assessors, and probably the root cause of most issues with HMRC, is that media is a wide-ranging term which is hard to define through HMRC’s current system.

If HMRC operate a risk-based approach, using SIC codes as the primary indicator, then there are only a handful of appropriate SIC codes that a company could possibly choose from. Take the sum of all publishing activities, for example:

  • 58110 Book publishing
  • 58120 Publishing of directories and mailing lists
  • 58130 Publishing of newspapers
  • 58141 Publishing of learned journals
  • 58142 Publishing of consumer and business journals and periodicals
  • 58190 Other publishing activities
  • 58210 Publishing of computer games
  • 58290 Other software publishing

HMRC may flag SIC codes not typically associated with R&D tax relief for further investigation, because at first glance, it is hard to see how the businesses which fit into these SIC codes would be suitable for the eligibility criteria for tax credits – addressing or overcoming an uncertainty in science or technology.

In the eyes of HMRC, the development of media is deemed high-risk, hence the additional compliance activity and higher rejection rate.

Addressing pre-conceptions

When preparing R&D tax claims for media firms, we must ask ourselves what media development is.

There is a lot of very clever stuff going on in those sectors, but how does that relate to a field of science or technology? Typically, the R&D would be in Information and Computer Sciences, but we would still class this as a high risk SIC code in the case of media firms.

This is where we must examine what exactly is being developed. Media development in the sense of content creation is not considered R&D for tax purposes, but the development of new electronic equipment to produce that content could indeed be meet the required criteria – but in that instance the work is electronics or electrical engineering no media!

It can be a bit of a minefield for accountants and the firms they advise, which is why our role is so highly specialised.

The issue of expertise

There is almost certainly a degree of misunderstanding within the accountancy sector, particularly for those firms which lack internal expertise in R&D tax relief, expertise which is essential to advising high-risk sectors.

First off, it’s essential that the SIC code reflects the R&D activity of the company, if possible, as any mis-match will need to be explained clearly and mitigated before proceeding with a successful claim.

Additionally, media firms which claim tax relief for R&D on developments tangentially related to their primary trade may well lack a “competent professional” in a relevant field, which could affect the validity of a claim.

However, these issues are reflective of a wider challenge. We know that it isn’t just media firms being put off claiming by the current approach to compliance – the software and technology world is being affected as well.

We’ve had a number of conversations with industry professionals, and they are all of the same opinion – uncertainty is making firms unwilling to submit claims going forward.

We’re here to turn this around and provide some certainty over R&D tax rules, making it easier for firms with compliant claims to benefit from their innovations, whatever sector they operate within.

Contact a member of our team to find out more.