An R&D culture within business is instrumental at increasing productivity and stimulating growth. R&D tax credits are a fantastic support for those companies investing time, money and resources into further developing and improving their products, processes, services or software. It is no wonder that R&D tax credit relief is a core part of the government’s support for innovation, a relief which has consistently increased in its generosity since its inception in 2000. It will be a great contributory factor in helping the government hit its target of seeing UK spending on R&D reach 2.4% of GDP by 2027.
Unfortunately, the lure of, what can be, large sums of cash has encouraged unscrupulous companies to take advantage of the relief, either by viewing it purely as a money-spinning exercise or an opportunity to defraud the system.
Two key areas identified where the relief can be at risk of manipulation are:
- Companies falsely claiming that they are undertaking qualifying R&D activities, or exaggerating its extent; and
- Unscrupulous advisers wrongly over promising and producing incorrect reports, putting the claimant business at risk of serious repercussions and HMRC penalties.
What are HMRC doing to combat this?
A two-pronged approach has been put in place to combat fraudulent use of the R&D tax credit system.
Clamp down on fraudulent R&D tax credit claims.
The relief has delivered such value to legitimate companies, and as such, it has become a target for companies to make fraudulent claims as an attempt to obtain significant amounts of money. HMRC has identified (and prevented) fraudulent attempts totalling over £300 million.
HMRC have put plans in place to help deter the abuse of the scheme and in turn preserve the reputation of the relief.
One of the measures introduced will affect companies who receive a payable R&D tax credit. HMRC has identified this category of claimant as being at higher risk of fraud, since the claimant company does not need to be tax paying (and may have never paid any corporation tax) and is still able to access a significant cash payment from HMRC.
This measure will limit the amount of payable R&D tax credit an SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
A company is exempt from the cap if:
- its employees are creating, preparing to create or managing Intellectual Property (IP) and
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons
This rule is enforceable in the first accounting period beginning on or after 1st April 2021.
Going after the unscrupulous advisers – raising professional standards in the R&D tax credit advisory sector.
The Professional Conduct in Relation to Taxation (PCRT) sets out the principles and standards of behaviour that all members must follow in their tax work. All member firms of professional bodies are obliged to apply these rules.
The guidance has been updated to cover the application of professional standards to the provision of R&D tax credit services, stating that an R&D tax adviser should be meeting regulatory obligations, which include anti-money laundering (AML) and GDPR compliance.
The guidance also stipulates that R&D tax credits are recognised as a specialist service and that the adviser should be competent to provide that service, at all times performing their duties with the upmost professionalism.
Penalties can be imposed on claimant companies (not the adviser) by HMRC for wrongly prepared submissions. You need to ensure that you have full confidence and trust in your chosen adviser in terms of their qualifications, experience and reputation.
Competent advisers will have the necessary professional qualifications (such as Chartered Tax Adviser or CTA) and experience to guide you correctly, and the respective company should be a member firm of a professional body applicable to this field such as the Chartered Institute of Tax (CIOT) or Institute of Charted Accountants in England and Wales (ICAEW). At LimestoneGrey, we are a regulated firm of Chartered Tax Advisers, a qualification which is seen as the gold standard here in the UK. You should never be tempted to use an unqualified adviser, as it is unlikely they will have a complete understanding of the tax legislation and how it should be applied in each situation.
We would always advise you to do research into the adviser and their company before taking the step to form a working relationship and of course use your instincts. One alarm bell moment that should cause you some concern, for example, is an adviser informing you of the size of your claim during an initial consultation. Without completing a detailed review of your financial information and projects, this is an impossible task.
Matthew Jones, Managing Director at LimestoneGrey commented:
‘The measures implemented by HMRC are essential for retaining the credibility of the relief. Unfortunately, the actions of some have forced the situation and as a qualified tax adviser, it is disappointing to see that the system can be open to abuse, whether that is on the side of the claimant company or the adviser. It is important to remember that a large proportion of companies who do take advantage of the relief do so legitimately.
The PAYE cap is one of a variety of measures introduced by HMRC to deter fraudulent activity but my hope is that it does not negatively impact genuine companies from making R&D tax credit claims.
If you feel that your company could be adversely affected by the PAYE cap, we would urge you to speak to a qualified adviser who will be able to guide you on the impact to your claim and what options are available to you.’