In this article, Ross Howarth looks at what may lie behind the increasing number of fraudulent R&D claims being submitted to HMRC recently, the steps the body is taking to combat erroneous claims, and how businesses best stand a chance of avoiding an HMRC enquiry.
The R&D Tax Credits Scheme
Born in the year 2000, the R&D Tax Credits scheme has proven itself to be a vital additional revenue stream for thousands of businesses across the UK – from construction firms that are developing more sustainable housing, to software companies creating an ever more automated world.
There is no denying that the R&D scheme is a highly important source of revenue for forward thinking, innovative businesses, however the poor regulation of third parties offering specialist support is rather troubling. Before diving into this topic further, it is crucial to understand what the existing landscape of R&D claims look like.
The Current Landscape
As of June 2020, £5.3bn of R&D tax relief support was claimed by UK businesses – an increase of 15% on the previous year. 15,750 first time applicants submitted claims for the first time, which is a rise of 10% on the preceding 12 months. What can we gather from this data? Well, the UK is certainly becoming more innovative and we can safely assume that a reasonable number of companies which will have qualified for a number of years are only just realising they can benefit from the scheme.
As strong as the data is, there is a harrowing undertone to a small proportion of the claims that have been made. The tone being fraud. In their Annual Report which was published this week, HMRC has identified a figure as high as £336m worth of fraudulent claims via the R&D Tax Credits scheme. This equates to 3.6% of the total value of claims, with the proportion potentially as high as 5.5% for SME claimants.
In November 2020, three men were jailed for a bogus £29.5m R&D tax relief claim. The perpetrators used a registered company, Clinical Information Systems Ltd, to claim the relief on a fake IT healthcare system which they attempted to claim £137m worth of R&D expenditure on. After submitting the claim, the men were asked for supporting evidence that the claim was in fact legitimate, and having failed to provide this, they were subsequently jailed.
At the time, HMRC published the following statement: “This wasn’t research and development, it was out and out fraud. HMRC will continue to create a level playing field for law abiding businesses by rooting out the minority who seek to abuse these schemes, as this result clearly shows.”
Increased Scrutiny on R&D Claims
So what does this mean for your claim? Well, it is now more important than ever to ensure that your claim is fully compliant and will stand up to HMRC’s scrutiny in the event of an enquiry. Businesses claiming R&D should be aware that, as a direct reaction to the recent influx of fraudulent claims, HMRC hired an additional 100 inspectors last Winter, whose exclusively focus is on reviewing R&D Tax Credit claims.
The echelon of what is considered a compliant claim has increased, and HMRC reviews the technical report pages of each claims with a fine toothcomb to ensure every claim it is legitimate. Even claims which are legitimate, but lack sufficient information or evidence to showcase why the nature of the work is entitled to a specific benefit, may raise the eyebrows of the inspector and result in an enquiry. Furthermore, if there is no evidence to rebut the inspector’s queries following an investigation, this can result in penalties.
Penalties can be extremely harsh, however they are relative to the level of negligence or fraud which is identified. The penalties tend to average around the 15-30% mark in terms of lost tax relief if there has been a ‘careless’ mistake. If a ‘deliberate’ mistake has been made, a business will be looking at a 30-70% in lost tax and this could rise to 70-100% if the HMRC identifies a ‘deliberate’ mistake with concealment – essentially a fraudulent claim.
Let’s say your claim value is £50,000 and you receive a penalty based on a ‘careless’ mistake, you will receive a penalty of £7,500 to £15,000. Furthermore, the interest on the penalty is 3% per annum if not paid. If the mistake were ‘deliberate’, up to the full £50,000 can be fined. It is therefore crucial that a business receives the best advice around their R&D claim, in order to both avoid hefty penalties and the time investment required to challenge an HMRC enquiry.
Approximately 250 registered UK businesses now offer ‘specialist’ R&D Tax Credit support services for companies looking to claim on the scheme. The vast majority of these have entered the market within the past five years. You are most likely thinking; what accreditation do these companies need to have to operate? The answer, surprisingly, is none.
Any one person can set up an R&D Tax Credit consultancy currently and claim to be a quote on quote specialist. This means they can offer complex financial advice on putting together a claim for any business with zero actual accreditation. There are of course a good number of consultancies that have strong and robust processes and are true specialists; it is important, however, that businesses are aware that the industry has become diluted with companies which apparently offer large payouts coupled with low fees which is a testament to their “specialist services”. Ever lower fees tend to be a giveaway as they reflect the level of time and resources invested by the “specialist” and these firms see a far higher level of HMRC enquiries than the long-standing R&D providers.
There are three fundamental factors to take into consideration when selecting an R&D specialist.
Providing those three fundamentals are strong, the value of the claim will almost always be maximised, whilst ensuring there won’t be any challenge from HMRC.
Technical Expertise and Criteria
Any business can claim R&D as long as its projects meet the following criteria:
The difficulty with this criteria is that it is incredible broad and can potentially be interpreted differently from industry to industry.
For that reason, it is important that the claimant company uses the services of an experienced R&D provider, which employs competent professionals with the relevant industry knowledge to compile a technical report. Failure to do so may result in substandard claim submission, with little to no evidence that the R&D activity detailed actually met the criteria of the scheme.
With the ever increasing levels of scrutiny from HMRC, it is more important than ever that your R&D provider can offer a robust defence strategy in the event of an enquiry. If HMRC does raise an enquiry and your provider has not have a suitable defence process in place, you/your business will be liable to respond to HMRC with all the supporting evidence – and it is a complex and time consuming process. On the other hand, if you select an R&D specialist which carries out the claim process with superior due-diligence, all evidence will already be in the best possible shape, resulting in a smooth and speedy resolution to any enquiry.
The importance of reducing the amount of time spent by a company on their claim goes without saying. Applying for an R&D Tax Credit claim showcases the level of innovation undertaken by a business, as well as the amount of time they have invested in their projects and will continue to invest. Any provider must be able to offer both the technical and tax expertise necessary to streamline the claim process for their clients as much as possible and minimise the amount of time expected by them and their internal teams.
Insights from Ross Howarth, Business Development Executive, Leyton UK
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