HMRC’s more thorough approach means companies cannot afford to take compliance for granted.
Since the start of the tax year, we have seen a marked change in HMRC’s policing of R&D Tax Relief claims.
The agency has ramped up compliance checks, implemented a range of new regulatory measures, and recruited its specialist fraud investigation unit to send intimidating letters to eligible claimants.
These changes are ushering in a new era of R&D Tax Relief administration, one in which claims containing inaccuracies, ineligible costs and projects, and that fail to adequately explain their development work are significantly more likely to attract an HMRC investigation.
In this new era, claimants can no longer afford to take compliance for granted.
"These changes are ushering in a new era of R&D Tax Relief administration, one in which claims containing inaccuracies, ineligible costs and projects, and that fail to adequately explain their development work are significantly more likely to attract an HMRC investigation."
Companies that want to minimise their chances of an enquiry while ensuring they are claiming their full, legal entitlement of relief should seek support from an experienced R&D Tax Relief provider.
Rising enquiries
These changes are an attempt by HMRC and the government to stem the rise in fraudulent and abusive R&D Tax Relief claims, an issue that has concerned the treasury and the tax agency for some time.
In the 2020-21 tax year, HMRC estimated that erroneous and fraudulent claims cost the taxpayer £469 million, £150 million more than in 2019-20. While abusive claims – those that include spurious projects and costs – are harder to measure, observers in and outside of government believe they are also rising at pace.
The increase in abuse can be mostly attributed to an influx of unscrupulous R&D Tax Relief agents, posing as experts, which knowingly submit oversized claims on behalf of unsuspecting clients.
The first thing HMRC did to counter this rise was to increase the rate of enquiries. Enquiries, or compliance checks, are detailed investigations during which tax inspectors judge a claim’s accuracy and eligibility.
Facing an enquiry can delay a company’s R&D Tax relief by several months or years and embroil its senior financial and technical people in lengthy back-and-forths with tax inspectors.
"The increase in abuse can be mostly attributed to an influx of unscrupulous R&D Tax Relief agents, posing as experts, which knowingly submit oversized claims on behalf of unsuspecting clients."
These enquiries – facilitated by the government’s recent investment in 1,300 new tax inspectors – have led to several criminal investigations, one of which led to the high-profile arrest of three men who attempted to fraudulently claim nearly £30 million.
Legislative support from the government
The government has backed HMRC’s efforts by making a suite of legislative changes.
In 2021, the treasury reinstated a cap on payable tax credits for SMEs based on their PAYE and NIC contributions. Previously in force between 2000 and 2012, the PAYE Cap is designed to prevent claims from shell companies that do not perform qualifying R&D.
In the 2021 Autumn Budget and Spending Review, Rishi Sunak, then Chancellor, announced that expenditure on international subcontractors – a considerable source of fraud but an important resource for growing companies – would no longer be eligible for SME R&D Tax Relief.
The Prime Minister also announced that the government would reform the R&D Tax Relief scheme following a detailed review and consultation led by the tax agency. The reforms, which include requiring all companies to submit a technical report, are due to take effect on 1 April 2023.
While the government slashing SME R&D Tax Relief and increasing the R&D expenditure credit (RDEC) was also a response to fraud and abuse, it should not be seen as a direct attempt to protect the scheme from further malicious claims.
New measures and the fraud investigation service
Then, in April 2022, HMRC announced that it had identified “a pattern of irregular R&D claims”. It’s unclear whether this pattern was distinct from the general rise in fraud and abuse the agency has been tracking for several years.
In response, the agency implemented “additional measures” to tackle error and fraud. They were:
- Establishing a threat risk assessment process for all research and development claims
- Implementing additional payment identification and verification controls for all research and development payments
- Accelerating the creation of HMRC’s Research and Development Anti-Abuse Unit
These measures caused considerable delays in processing times over the summer, showing that HMRC is not afraid to bring things to a complete halt when they feel the scheme is threatened.
Soon after this announcement, hundreds if not thousands of companies began receiving threatening letters from the Fraud Investigation Services Unit (FIS), a team of experienced officials tasked with investigating high-value tax fraud.
These letters accused businesses of “fraudulently claimed money to which you were not entitled”. This intimidatory tone is significantly different from the inquisitive and matter-of-fact language normally found in the correspondence at the beginning of an enquiry.
The FIS intervention is still ongoing; HMRC has given little indication of how long it will last.
Don’t take your R&D Tax Relief compliance for granted
Perhaps more than any of the other changes HMRC and the government have made to R&D Tax Relief, the involvement and actions of the Fraud Investigation Service prove that this really is a new era for the scheme’s administration.
In this new era, if you want to avoid lengthy enquiries, maintain HMRC’s trust and continue to ensure you claim your full, legal entitlement of relief, you must do three things:
- Make you are up to speed with all the changes that are happening to the scheme, from big-ticket items like changes to relief to smaller-ticket alterations like tweaks to the filing process
- Ensure your claims are 100% compliant and do not include any spurious costs or projects
- Defend your claim with a clear and accessible technical report that explains why their R&D qualifies for relief
The easiest, safest, and most cost-effective way to achieve these things is to work with an experienced and trusted R&D Tax Relief specialist like GrantTree.
GrantTree has 12 years of experience successfully filing R&D Tax Relief claims for startups, scaleups and multinationals.
We’ll handle your claim preparation process from start to finish, saving you time while giving you peace of mind that your submission and your company’s reputation are in good hands.
Unlike traditional accountants – and many R&D consultants – we’ve invested heavily in technical expertise, meaning we can prepare a watertight technical report that will justify your claim’s eligibility to HMRC’s tax inspectors.
To find out more about getting expert support from GrantTree’s R&D Tax Relief experts, just get in touch.
