Research & Development Tax Credit

As reported previously in our newsletters, HMRC halted the payment of Research & Development (R&D) tax credits while it investigates irregularities.  HMRC contacted accountancy firms informing us of the decision to pause the payment of R&D tax credits, as it investigates what it refers to as ‘irregular claims’for the tax credit payments, to ‘ensure they prevent abuse of the relief’.

R&D tax relief is a government tax incentive designed to encourage investment in the UK for innovative projects. There are two regimes for R&D tax relief: the small and medium sized enterprise (SME) scheme, and the R&D expenditure credit (RDEC) scheme, for expenditure that does not fall into the SME scheme.

To qualify for the relief, a company must be looking to develop new or improved products, processes, materials, services, or devices that represent an advance in science or technology through the resolution of scientific or technological uncertainty.

The generous tax relief has been suspected of being abused, and HMRC have introduced checks and balances. For example, from 1 April 2021, SME R&D tax credit claims are subject to a cap. The cap limits the amount of cash that can be claimed as a repayment and is restricted to the payroll costs the business has incurred in the UK.

Over the tax relief’s history, HMRC has introduced at various times, additional checks on R&D claims and placed more resources to crack down on abuse of the relief.

The estimated total amount of R&D tax relief support claimed for the year ending March 2020 is £7.4bn, an increase of 19% from the previous year. This corresponds to £47.5bn of R&D expenditure, 15% higher than the previous year.

The recent announcement was made on the tax agents’ forum, with HMRC stating: “We appreciate agents’ and claimants’ patience while we handle these claims,”. HMRC set out a number of specific procedures that claimants must follow when submitting a claim, adding that if a claim is incorrect, inflated, or fraudulent a penalty may be incurred.

In 2019/20, the National Audit Office extended the qualification in HMRC’s accounts to include R&D tax relief, due to the estimated level of fraud and error. The National Audit Office accounts estimated error and fraud across both the SMEs and RDEC schemes as 3.6% of the cost of total tax relief of R&D tax credits, or £311m in cash terms.

The relief has enabled a growth industry in firms offering R&D tax relief services only, leading to a growth in cold calling to SMEs, advising that claims can be made, charging on a commission basis. Professional accountancy bodies have raised concerns that the growth in the industry has resulted in dubious claims.  The ‘no win/no fee’ basis of charging has led companies to view an R&D claim as cost-free bonus and some agents have been willing to accept questionable claims.

HMRC allocated additional resources to R&D tax relief compliance team, with 100 new compliance officers, who’s objective is to understand the nature and scale of the error and fraud associated with the reliefs.

As a result of the recent suspension, HMRC has recently started to send letters to R&D claimants accusing them of fraud. The letters appear to be identical other than the addresses details and the amount of the claim and sent from HMRC’s Fraud Investigation Service (FIS), indicating that the businesses have fraudulently claimed Research & Development (R&D) tax relief and credits.

We understand the letter states in all cases:

The claim triggered an alert on our systems and has caused HMRC to believe that you have fraudulently (my emphasis). claimed money to which you were not entitled. Therefore, HMRC has blocked payment of this money, to which we believe you are not entitled.

The letter requests a significant amount of information about the claim.

There is no information on what has triggered HMRC’s action. However, historically the Fraud Investigation Service, FIS, and its previous incarnations, undertake their due diligence before making such a serious accusation and their first letter to the taxpayer would suggest they had enough information to take a prosecution.

Feedback from accountants and agents, who have received or seen these letters, are adamant that there is no fraudulent intent. There may be errors in the calculations but nothing which should prompt the kind of action indicated by these letters and the involvement of FIS.

In requesting significant information, the next issue is, where HMRC will find the resources to review all the documentation demanded (as this could be significant). It is therefore likely matters will be significantly delayed, and HMRC will be holding on to what may be legitimate refunds.

For Harbour Key clients, we are now only just starting to submit our tranche of claims, due to accounting year ends, so currently we don’t have any claims “stuck” in the system.  However, it appears that this hold up is going to take time to clear, with additional checks on new claims, and so there will be considerable delay before clients receive their repayments, in what are challenging economic times.

Should you need to discuss your Research & Development Tax Credit claim, please contact our offices.