HMRC crackdown on speculative R&D claims

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R&D tax relief has been available on qualifying expenditure for over 20 years. From modest beginnings, companies now get annual deductions totalling around £9.5bn. However, HMRC estimates some £0.5bn of that is wrongly claimed every year through error or fraud. In some cases, this has involved bad actors in the advisory sphere contacting businesses which had never previously considered they undertook R&D offering to help them claim tax credits in return for a percentage of the “savings” and proposing more aggressive claims.

HMRC are now on the alert for dubious claims. HMRC challenges to R&D claims have risen ninefold since 2019. In particular, HMRC are starting to systematically target the current and former clients of R&D boutiques who went too far.

Latest figures from HMRC reveal that R&D tax credit schemes have lost over £4 billion to fraud and error since 2020

(Article updated 6 August 2024)

On 29th July 2024, Rachel Reeves announced a budget (to be held on October 30 2024) to ‘fix the foundations of the economy’ after revealing a ‘hole’ of £22 billion in public finances.

Following Reeves’ announcement, HMRC’s latest accounts reveal that £4.1 billion has been squandered since the R&D schemes were introduced in 2020. HMRC says expenditure on the reliefs in 2023-24 was £7.7billion.

Tax officials stated that the levels of error and fraud were ” clearly unacceptable” and have promised public action. We will provide further details once any updates are provided.

Where that leaves old claims HMRC didn’t previously review in detail

HMRC have civil powers to go back many years to recover historic tax repayments and savings from excess claims. If businesses and / or their advisors acted carelessly or deliberately that can mean up to 6 years or 20 years respectively. Any recoverable tax is also subject to late payment interest – with HMRC charging 7% as at 31 May 2023 and likely increases on the way.

Depending on the behaviours involved and the degree of mitigation, civil penalties range between 0% and 100% of the additional tax or over claimed repayments.

In the most egregious cases HMRC might also consider criminal prosecution.

Where that leaves new R&D claims going forward

HMRC is now reviewing new claims much more carefully and taking a firm approach to any it suspects are fraudulent. HMRC has set up a specialist team in its Fraud Investigation Service to challenge and block such claims. That could result in hefty tax geared penalties based on the tax that HMRC would have been lost had such a blocked claim been allowed or, again, criminal prosecution in the most egregious cases.

Businesses should not be deterred from making legitimate R&D claims. However, they should not make them speculatively or without seeking the advice of reputable tax advisors. From 1 August 2023, new tighter rules include the need to:

Identify any advisor who has assisted with the claim;
Identify the responsible internal person within the company itself;
Provide a wealth of detailed supporting information;
To spell out, in HMRC’s words:

What is the main field of science or technology.
What was the baseline level of science or technology that the company planned to advance.
What advance in that scientific or technological knowledge did the company aim to achieve.
The scientific or technological uncertainties that the company faced.
How did your project seek to overcome these uncertainties.

How we can help

Our tax specialists are experts in making R&D claims. They are equally well placed to review past R&D claims made on the advice of other advisors which could now be causing sleepless nights.

In the event that we conclude past claims might have been unjustified, our Tax Disputes team can expertly approach HMRC to confirm the position for all years such claims were made. In doing so, they will head-off the risk of HMRC opening an intrusive and punitive investigation and mitigate the position to minimise any tax payable and the penalties and late payment interest thereon.

This post was written by Andrew Park, a Tax Partner at Price Bailey. Andrew specialises in tax investigations and has particular expertise in providing solutions to tax problems and resolving investigations and voluntary disclosures with HMRC. If you have any questions on the above or related to making an R&D claim, you can contact Andrew or Gemma Thake using the form below.

HMRC powers to amend corporation tax returns and charge penalties

Under longstanding provisions in the Finance Act 1998 (“FA98”), HMRC can enquire into a claim made in a recent tax return and amend the return upon closing the enquiry or use “discovery powers” to reject any relief which “is excessive” and recover any underpaid tax in the previous:

four years where there was an “innocent error”;
six years where was a “careless error”;
twenty years where there was a “deliberate error”.

Additionally, HMRC officers reviewing R&D claims have just started to apply previously unused “Para 16” powers in FA98 to correct “obvious errors” in recent returns without the need to open a formal enquiry or even needing to have any prior discussion with the taxpayer. HMRC state they will now use these powers widely: “to remove the R&D claim where we have reason to believe it is incorrect, given the information available to us”.

Depending on the “behaviours involved” and the amount of mitigation granted, where errors have arisen and claims are rejected, HMRC can apply penalties of between 0% and 100% of the “Potential Lost Revenue” involved. This is in statute at Sch. 24 Finance Act 2007. Potential Lost Revenue will include not just any tax underpaid after a claim was previously allowed, but also any tax that would have been underpaid with a claim that was never allowed – as well as the expected future tax effect of any claim that merely increased as yet unused losses.

HMRC’s conclusions can be challenged or appealed. However, it is best to engage with HMRC to address any concerns HMRC might have cooperatively before any decisions become entrenched and are formalised. Cooperation and transparency is also vital in seeking to mitigate any potential penalties.

In the event companies identify errors in past R&D claims it is vital that they act without delay to make full voluntary disclosure of the errors to HMRC before they come under investigation. That will go a long way towards minimising any penalties as well as helping to persuade HMRC that the errors were not deliberate. On the other hand, any companies which might identify past innocent or careless errors HMRC are still in time to assess but might decide not to disclose them would then place themselves in the deliberate wrongdoing category – notwithstanding it wasn’t deliberate to start with. If directors are in any doubt – for instance, about whether HMRC would still be in time – do seek advice.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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