HMRC targets R&D tax credit claims

HMRC has started targeting claims made by companies under the R&D tax credit regime. In the last few years, a lot of companies submitted claims, having been contacted by R&D tax credit consultancies.  These consultancies promised a hassle free claims process.  They also told prospective clients that HMRC had never rejected claims and that if in the unlikely scenario that there was an enquiry, they would deal with HMRC.

What is the problem?

The R&D tax credit regime was designed to encourage UK companies to invest in research and development activities.  

According to HMRC, in order to be able to make a claim, companies needed to explain how a project:

• looked for an advance in the field
• had to overcome the scientific or technological uncertainty
• tried to overcome the scientific or technological uncertainty
• could not be easily worked out by a professional in the field

It was anticipated that the project would research or develop a new process, product or service or improve on an existing one.

Over time, consultancy firms entered the market place and offered to make claims on behalf of companies, usually for a percentage of the total amount of tax credits claimed.  They contacted businesses directly and offered to make the claims on their behalf, promising to deal with HMRC in the event of a tax enquiry.

In the last few years, it became increasingly obvious that there were a significant number of claims for R&D tax credits being submitted by construction companies, retailers and other businesses that were unlikely to meet the eligibility criteria.  

At the same time, HMRC was under pressure after two years of Covid and home working, as well as a lack of technical staff – at one point the HMRC main helpline was shut down for 6 months so that the backlog in activities could be dealt with.

HMRC usually selects enquiry cases on a risk basis and makes assumptions on the level of non compliance in tax claims. However, after undertaking checks across the entire population of claims, HMRC announced that the level of fraud and error was much higher than had been expected and nearly 50% of all R&D claims contained errors.

Now HMRC has announced its intention to investigate the R&D tax credit industry and to clamp down on ‘bad practice and fraud’ in tax credit claims.

What is HMRC doing to address this?

Last year, HMRC published an analysis of claims in the 2020-21 tax year which estimated that almost a quarter of claims by value in the SME scheme and 3.6% of claims in the large company scheme were either incorrect or fraudulent – with a combined cost to the Exchequer of an estimated £1.13bn.

As a result, several changes have been announced:

• The ‘merging’ of the SME and RDEC R&D tax relief schemes for accounting periods beginning on or after 1 April 2024 is designed to help to prevent non compliance by offering a simpler claims procedure.
• There has also been an increase in compliance checks with HMRC hiring 300 new inspectors to look solely at R&D tax relief claims.
• Alongside compliance checks, HMRC has strengthened its guidance in an attempt to more clearly demonstrate eligible and non eligible R&D activities.

In addition, new regulations were introduced in 2023, to cover the process of how companies make an R&D claim.  

For all claims made after 8 August 2023, companies are required to submit an additional information form before filing the company’s corporation tax return.

Companies who are making a claim for the first time, or after 3 years of making an earlier R&D claim, must notify HMRC that they are making a claim for accounting periods beginning on or after 1 April 2023 within 6 months of the end of that accounting period.

HMRC has announced that its inspectors will be much more thorough over the next few years, in their scrutiny of claims and businesses seeking to claim R&D tax reliefs should ensure they understand their obligations and keep abreast of any changes to the schemes.  Indeed the first enquiry notices from HMRC into R&D tax credit claims have started to hit finance directors’ desks and no doubt there be more to follow.

If you have any questions or queries as to how any of the above may affect your business, please get in touch with your Swindells partner who will be able to advise you further.