During the 2021 Autumn budget, the government highlighted their deep concern over abuse and boundary-pushing involving the R&D tax credit relief. Evidence shows that this abuse has grown in recent years. It is estimated that error and fraud across both SME and RDEC schemes equates to 3.6% of total relief cost, or £311 million.
Matthew Jones, managing director, LimestoneGrey, commented:
The concern over abuse and fraud in the R&D tax credit industry is mirrored by qualified professionals. Unfortunately, a minority are tarnishing the reputation of the relief and as a result, there is a risk that good advisors and companies who follow the rules and regulations are penalised. The fact that government is introducing measures to tackle this issue can only be a positive action, but it will be interesting to see if these measures go far enough at preventing this fraudulent activity whilst not harming genuine claimants who apply the rules correctly.
What are the issues facing the R&D tax credit industry?
There are two key areas in which the government are focusing on when it comes to relief abuse:
- R&D tax credit relief is claimed by companies in their CT (corporation tax) return. However, the current process presents a variety of risks for abuse. For example, a payable cash benefit is available to loss making companies that have never paid any corporation tax, making this attractive for possible abuse by fraudulent companies.
- There has been an emergence of unregulated R&D consultancies and advisers who are not members of any professional industry bodies. As these advisors do not have the qualifications to support their offering, a pattern has emerged whereby they use clever marketing and business development techniques to reach out to SMEs and sell them the dream of claiming back substantial amounts of money through R&D tax credit relief. Unfortunately, these activities can be performed by anyone, many with no background in tax and potentially with an impressive sales background. For SMEs who are new to the system and unfamiliar with the process, these tactics are incredibly powerful.
What are the proposed measures to tackle R&D tax credit abuse?
There are already measures in place to fight the emergence of fraudulent activity in the industry:
- HMRC has already allocated additional resources to R&D tax credit relief compliance in order to understand the nature and scale of the fraud taking place. However, the current increase will not be sufficient enough to tackle the issue. With the number of claims raising from 35,565 in 2014-15 to 85,900 for 2019-20, more resources are sill needed. HMRC recognise this and plan to further increase manpower with the introduction of a new cross cutting team focussed on abuse.
- The introduction of the PAYE cap launched in April 2021 aims to limit the number of fraudsters trying to take advantage of a cash boost in the form of a payable tax credit payment.
Government has now gone further by introducing additional measures. When changes come into force, the following points will need to be implemented by advisors and businesses:
- all R&D tax credit claims will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
- digital claims will in future require more technical detail
- each claim will need to be endorsed by a named senior officer of the company
- companies will need to inform HMRC, in advance, that they plan to make a claim
- claims will need to include details of any agent who has advised the company on compiling the claim
Matthew Jones commented further:
The measures listed above reinforce the fact that businesses need to have full confidence and trust in their chosen advisor. These measures enforce companies and advisors to be more transparent by:
- creating a digital footprint
- providing further content in the submission
- naming responsible officers on both the advisor and company side
The hope is that these measures will discourage unscrupulous agents and companies from exploiting the system as there will be no room for them to hide when submissions are being scrutinised by HMRC.
LimestoneGrey’s recent blog on choosing the right advisor outlines tips on finding the right advisor for your company
What are the next steps?
While the government will put the plans in place to prevent this abuse, it is interested in further views from stakeholders.
Draft legislation will be published later in the summer, with final legislation included in the Finance Bill 2022-2023. Changes will take effect from April 2023.