What’s behind HMRC’s rigorous new approach to R&D compliance?
For a long time, advisers working in tax relief were subject to very little scrutiny by HMRC when it came to R&D compliance, and the risks involved in submitting a claim were fairly low. Unless the claim was excessively large, or very obviously flawed, the claim was unlikely to be looked at in any detail.
Many specialist ‘advisors’ benefitted, charging lucrative contingent fees, often advertising their services with the promise of ‘free money’ and ‘100% success’. The amount of SME relief given out each year went up and up whilst the average level of an R&D adviser’s experience fell.
Concerns started to mount on R&D compliance
Concerns over abuse of R&D tax reliefs have grown in the past couple of years, with the primary issue stemming from unregulated R&D advisers targeting SMEs who were unaware of the R&D relief scheme and encouraging them to make a claim.
HMRC has identified evidence of organised criminal activity within the R&D scheme and last year The Times published a series of articles highlighting rampant boundary-pushing within the R&D scheme.
When eight people were arrested for fraud last year after they were alleged to have arranged more than 100 sham claims worth in excess of £16 million, and laundered the proceeds we said then that this was just the tip of the iceberg!
In its latest annual report and accounts, HMRC estimated that £469m was lost through its two R&D schemes in 2021-22 alone, equivalent to 4.9% of corporate R&D reliefs.
Because of all this, the spotlight is now well and truly on R&D tax relief – and HMRC has been responding.
HMRC has ramped up R&D compliance
HMRC began to react last year. On 17 May 2022, HMRC announced they were temporarily postponing payments of R&D credit claims and on 14 June 2022, HMRC announced they were extending the timeline for processing claims from 28 days to 40 days.
In late 2022 HMRC abruptly changed up a gear and all of a sudden, even advisers who’d never had an enquiry now found themselves with several on their desks.
Conservative accounting firms are also being targeted, and SMEs with a long track record of claiming are being robustly challenged on why their work qualified.
A change in HMRC’s attitude to R&D compliance
It’s not only the vastly increased number of R&D enquiries that have raised eyebrows but also the way in which HMRC have been approaching them which has come as a surprise.
It’s being reported that HMRC’s final decision invariably seems to be ‘None of this qualifies as R&D’ with stated reasons including:
- ‘We don’t think this is an advance’
- ‘We don’t think this was an advance for the industry’
- ‘We don’t think you’ve used Competent Professionals’
- ‘We think the work would have been readily deducible to Competent Professionals’
- ‘We don’t think this work was conducted as a project’
- ‘There’s not enough evidence that the work took place’
It’s important to note that this isn’t just affecting a minority of R&D advisors. Instead, it seems to be happening right across the board, with all types of advisers affected, operating in many different sectors.
So, what’s going on?
Clearly, the crackdown by HMRC is in part in response to tackle the abuse of the scheme which we highlighted above.
There’s partly a political agenda here too though. In its most recent consultation on R&D tax relief, it’s clear that the Government favours moving towards a single, unified R&D scheme for both SMEs and large companies with the new scheme more likely to be based on RDEC, the scheme for large companies.
It’s been pointed out that if they’re able to report that levels of error are unacceptably high in the SME scheme, that would ease the Government’s move towards an RDEC-like scheme for all.
No matter what the reasons behind this rigorous approach by HMRC, what we do know is that the current upheaval in R&D tax investigations will most likely continue for the foreseeable future.
Need our help?
Cowgills are experts in R&D tax claims, with over 15 years’ experience in reviewing, managing, and submitting successful claims. Now more than ever it’s essential that when submitting a claim for R&D tax credits you have an advisor with integrity, expertise, and experience. Get in touch with out R&D tax specialists if you’d like support.
The information was correct at time of publishing but may now be out of date.