The significant time and resource loss associated with HMRC inquiries into potentially fraudulent research and development (R&D) claims highlights the need for enhanced diligence, according to James Clark, associate director incentives and reliefs at Markel Tax.
“The finances, depending on the claim, could be significant, but the resources required to deal with an inquiry are just unbelievable,” says Clark.
“And when you’re doing that alongside dealing with things like furlough and covid, you can’t focus on running the business.”
HMRC figures show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).
Although, in theory, this paints a positive picture of innovation in the UK, a suspected uptick in spurious claims has sparked concern.
For instance, of the 85,950 R&D claims made, 85 percent were less than £100,000 in value – conceivably an indication of suspicious activity.
The role of external advisers
According to Clark, increasing abuse of the R&D relief system will inevitably highlight the value of capable and trustworthy advisers.
“We hear stories where the end company will make the claim led by the provider, and then the provider will say ‘well it’s your claim, if you didn’t think it was right, you shouldn’t have done it’.
“To me, that’s not right. You, as a professional adviser, are responsible for explaining what’s going on and ensuring that the client understands everything.”
Clark also notes that, in an ideal scenario, the adviser would sit down with the client and show them the figures in order to help them understand the claim and to assure them of its validity.
“A competent provider will have that to hand because that’s what gets submitted to HMRC to show what expenditure has been included.”
This is an area that sets Markel apart, he argues, going on to note that the firm will also defend submissions for free as part of the upfront cost.
“That’s a key area – it gives the client certainty that we’re in it for the long haul,” he says.
“We’re here to build ongoing relationships with people and do the right thing for them.”
Clark also stressed Markel’s diligence in the initial submission of claims, rather than just those that they have adopted after being submitted by a spurious provider.
Not being afraid to push back against clients is a crucial tenet of this, he argues.
“The key role for advisers is to ensure that the right companies are claiming the right amount of tax. That’s why we’re not afraid to say ‘no’ to clients – if we’re not confident about the claim then we won’t submit it.”
A changing landscape
While the UK government has historically encouraged businesses to claim R&D relief, the indications of spurious activity have sparked a recent change of tone.
First, to prevent misuse and ensure that the right amount of relief is being claimed, HMRC installed 100 new officers to its compliance unit in 2021 a move which, according to Clark, encapsulated the shift in stance.
“That was a real statement of intent,” he said. “HMRC have got limited resources, but they’re still acknowledging that this needs more attention because the system is open to abuse.”
Further to this, efforts were made to strengthen the system in the 2021 Autumn Budget. As a result, the scope of the R&D scheme will be “refocused” to target domestic innovation. At present, UK companies can file for relief based on developments that have been carried out by overseas sub-contractors.
In addition, Chancellor Rishi Sunak announced that the definition of R&D costs that are eligible for tax relief will be extended to include cloud computing and data.
The amendments to the scheme will take effect from April 2023.
But regardless of what’s happening on the legislative side, adds Clark, it’s always partly incumbent on the organisation to remain conscious and vigilant of fraudulent activity.
“It’s just about having that stop and check moment and thinking, ‘my accountant whom I work with on a month-to-month basis doesn’t think that I qualify, so how can these cold-callers who don’t know me think that I do?’.”