As a passionate advocate of the transformative power of R&D tax incentives, ForrestBrown has extensively covered the quiet – but substantial – shift in HMRC’s approach to R&D tax relief claims.
As I covered in my column for Accountancy Today, HMRC and the Treasury are now actively tackling what’s seen to be a misuse of R&D tax relief. Although I have been vocal in calling for HMRC to take measured, proportionate action, it cannot be denied that there is a problem in the R&D tax advice market.
Change is now here – and if you are one of the 70,000 companies that claim R&D tax relief each year, you need to make a few strategic adjustments. Before we explain further, it’s worth explaining why and how we’ve reached this point.
R&D fraud and erroneous claims
Far from warning of an impending clampdown on R&D claims, it’s clear to me it’s already begun. There have been some blockbuster cases of R&D fraud already grabbing headlines, like the Convergica case. A fraudster used his business to claim £29.5m in tax relief against a purported £137m spent “on developing an IT healthcare system for two countries in the Middle East”.
In a more recent case, six men were arrested after an investigation into a suspected multimillion-pound R&D tax relief fraud scheme. But these are just the most spectacular examples that slip into the public sphere.
In the National Audit Office’s (NAO) report on HMRC’s annual accounts, it’s stated clearly that HMRC believes there is £311m of error or fraud in its R&D figures. The NAO chastised the tax authority for not having a robust method to calculate this figure or a clear plan to resolve the problem.
There is also a major discrepancy between the R&D spend reported in the government’s annual BERD survey (which is used to measure the UK’s total investment in R&D) and the expenditure on which HMRC has given R&D tax relief.
HMRC’s figure is substantially higher, which could, at first glance, imply that there are spurious claims taking place – relief being awarded for work that isn’t R&D according to the BERD survey.
There’s a prevailing mood in Whitehall at the moment – they are worried about errors and R&D fraud and it’s up to businesses and advisers to read these messages and adjust accordingly.
From my vantage point, there appears to be misplaced confidence based on a misunderstanding of how claims work and where risk sits. And HMRC is now on a winning streak as far as R&D tax tribunals and fraud investigations go. It is emboldened and out to fight fraud and error with all the powers at its disposal.
Are you facing a HMRC enquiry? ForrestBrown’s enquiry support service is open to you >
Where are we now: HMRC’s approach to R&D tax relief
In a previous article, we connected the dots between four HMRC policy initiatives to understand where enforcement of the R&D tax regulations was going. Combined, these four initiatives represented the beginning of a “seismic shift” in HMRC’s approach to R&D tax relief.
The changes were:
- The PAYE/NIC cap: After a stay of execution due to COVID—19, these new rules come in from April 2021 and will affect the R&D tax relief of some genuine SME companies.
- New software guidance: We’re still getting regular calls for our enquiry support service due to HMRC’s hardening line on reviewing software R&D.
- New online submission service: This was launched without fanfare and while it still exists, it’s unclear to what end.
- New CT600 rule: Implemented on 1 April 2019, the new CT600 rule means that any R&D tax relief claim must now be accompanied by a full CT600 and computation. But, once again, HMRC has been quiet on whether this change reduced the errors they were seeing.
All the elements are there – and now, these steps will be bolstered by a beefed-up R&D tax relief compliance team. Recently, the NAO confirmed that the tax authority added 100 new R&D staff to its compliance unit in 2020.
This represents a very significant expansion in HMRC’s compliance muscle and can only lead to more companies facing enquiries into their R&D claims. This is combined with increased scrutiny during the enquiry process, and more use of mechanisms such as penalties and discovery assessments.
The most common R&D tax relief myths we see among companies claiming
R&D fraud is rarely the result of deliberate illegal acts. But errors in R&D tax relief claims are becoming too common, driven by a lack of awareness among companies of the process and their obligations, and a growing pool of spurious R&D advisers willing to take advantage.
Companies can protect themselves from errors by ensuring they don’t fall for the most common myths which lead to misplaced confidence.
- My previous claims have been ‘approved’ – There’s no such thing as an approved R&D relief claim. HMRC can and absolutely will take a look at previous claims it has paid out on. There is a set window during which they can open an enquiry (typically 12 months from submission), but if there are errors, they can look back much further. Bold statements around ‘approval’ are a common R&D marketing message – see five others you need to question too.
- HMRC can’t ask me to pay back the money they’ve given me – Again, it absolutely can.
- HMRC regulates R&D tax advisers – In our R&D tax relief research alongside YouGov, we found that 43% of businesses thought HMRC regulated R&D tax advisers. This is not the case. Our industry is partially (and voluntarily) regulated, but not by HMRC. ForrestBrown, for instance, is a member of the Chartered Institute of Taxation and must follow its code of conduct. Other advisers can be unregulated.
- I’m on a ‘no win no fee’ arrangement, so there is no risk – A success-based fee model is convenient, but ultimately it’s your claim, no one else’s. There will always be risk but a good adviser helps you to understand and manage that risk. They won’t make unrealistic promises about it being ‘risk-free’. Find out more about R&D tax credit fee structures.
- My agent takes care of my claim so I don’t need to understand it – You must be able to speak confidently on and understand your R&D tax relief claim. If HMRC has questions, its compliance staff will want to speak to you. Once again: it’s your claim. Any respectable adviser will help you with this, but many companies have found their adviser missing in action when faced with an enquiry.
Four ways to avoid a difficult R&D tax relief enquiry
It’s tricky to boil HMRC enquiries down to definitive causes. Sometimes, even if you’ve taken every reasonable step, HMRC will still do a compliance check for reasons outside of your control.
That said, if you are using an R&D tax adviser to help with your claim, choosing the right one can, in my experience, drastically reduce the likelihood of a difficult HMRC enquiry. Follow four simple steps: Quality check your adviser, understand your contract, know your R&D tax relief claim and get enquiry ready.
1. Quality check your adviser
As I mentioned earlier, the tax advice industry is partially regulated. If an adviser is not a member of a professional body, this means they are unregulated. Regulated advisers follow a detailed code of conduct set and monitored by their professional body. They must provide you with competent advice, operate with integrity and objectivity, treat your information confidentially and act professionally. If you are working with an unregulated adviser, you have very little protection. Look for a professional body badge on their website or simply ask.
Take a look at their marketing messaging too. Claims such as “100% success rate” or “HMRC approved methodology” should set alarm bells ringing. Remember: HMRC doesn’t ‘approve’ advisers or most claims.
2. Understand your contract
Apply the same standard of due diligence to your contract with an R&D tax adviser as anywhere else in the business. Nestled in the fine print, you can usually spot a few red flags like:
- Does the adviser offer HMRC enquiry support as standard?
- Do the contract terms tie you down for multiple years?
- What is the scope of the work i.e. what will the adviser actually be doing and what do they expect you to do?
3. Know your R&D tax relief claim
You need to be aware of the details of your claim and have confidence that they are correct. Your claim is yours. Ask yourself:
- Has my adviser shared my claim details with me and my accountant?
- Do I know what I’m claiming for and why?
- Do I have final approval of any claim I make?
- Am I confident that my claim includes everything I’m entitled to?
4. Get enquiry ready
It doesn’t matter if you have claimed for several years, or if you’re new to the incentive: anyone can be subject to enquiry.
HMRC will not be sympathetic if a company is under-prepared for its questions and unable to address all of its concerns. Most enquiries take several months to resolve and HMRC will need to speak to your ‘competent professionals’. These people need to be fully prepared for what can be a nerve-wracking challenge.
Is your adviser doing all it can to protect you from a difficult HMRC enquiry? And in the event of an enquiry, will your adviser see the enquiry through to its resolution with you?
Protect your business with ForrestBrown
The sci-fi author William Gibson makes the point that big events rarely happen in one fell swoop. Looking back, they are often difficult to pinpoint. In my experience, HMRC action often works similarly.
Different pieces of regulation, policy shifts and political philosophies tangle together and propel us into the future. A big part of my role is to keep an eye on these changes as they come down the pipeline and adjust accordingly for the benefit of our clients at ForrestBrown.
But I also believe that now is the time for all companies accessing R&D tax relief to make an adjustment and at ForrestBrown we are working hard to raise awareness of the misconceptions in the R&D tax market. Nostrums peddled by spurious advisers about ‘accepted claims’ can no longer be left unchallenged.
HMRC can and will investigate claims retrospectively (as far back as two decades if it deems the claimant to be “negligent”). These trends are going one way – and you still have time to adjust. Don’t get caught out.