In 2022, HMRC identified significant error and fraud in Research & Development (R&D) claims, specifically in the SME scheme. Subsequent research by HMRC estimated error and fraud to be worth £1.13 billion in 2020-21 alone. Since then, HMRC have introduced a ‘volume compliance’ approach to combat the fraud, as well as the rising cost of the scheme to the Treasury. We explore what HMRC’s current approach to tackling this fraud is and how businesses can avoid making mistakes when submitting a claim.
HMRC recent approach to tackling fraud and error
It has long been suggested that some claimants and advisors might be claiming for R&D tax relief for ineligible projects. Over 90,000 companies made R&D claims in 2021-22, with the total amount of tax relief paid out reaching £7.6 billion, an 11% increase from the previous year. Since this, HMRC has changed how they enquire into R&D claimants through a volume compliance approach and, due to the increased pressure to crack down on false claims, has increased the size of their investigative team.
This has drawn criticism from professional bodies such as the ICAEW and CIOT for the approach in raising enquiries and how they have been handled by HMRC inspectors. Alongside fraudulent claims, those who are genuine claimants have had to go through long, drawn out and costly enquiry processes that require a lot of resources and professional support to justify their real claim.
More recently, HMRC have targeted specific sectors and providers, with the intention of eradicating any fraud and some of the error within the R&D tax relief scheme. Enquiries into R&D claims have increased in specific sectors with high rates of non-compliance, such as care homes, wholesalers and retailers.
The top mistakes made by businesses
The most common cause for HMRC to reject an R&D claim is that a company’s project did not advance overall knowledge or capability and therefore did not amount to the research or development required to make the claim. There are lots of ways that HMRC can be led to investigate or reject a R&D claim. Some of the most common ones are:
- Missing or lack of documentary evidence to support a claim
- Businesses claiming under the wrong scheme e.g. when they do not qualify under the SME scheme
- Incorrectly claiming for subcontractor and subsidised costs under the SME scheme
- Claims for commercial projects, rather than scientific or technological advances
- Not clearly defining the baseline knowledge in the relevant fields of science or technology
- Failing to adequately explain in-depth complex scientific or technological principles, meaning the HMRC Inspector does not fully understand a business or its activities.
Ensuring that your project or projects are eligible is the most critical consideration when preparing an R&D tax relief claim. If an HMRC enquiry discovers that the claim has been completed incorrectly or has not been handled with care, you could be fined up to 100% of the tax loss.
With a quick response and correction of any problems that have been identified, HMRC can choose to reduce and even suspend any penalties.
Recent changes to R&D tax relief
As well as an increase in enquiries, a new reformed scheme took effect from 1st April 2024, in which HMRC introduced reforms to R&D tax relief by merging the R&D scheme for small and medium-sized enterprises (SMEs) and the Research and Development Expenditure Credit (RDEC) for larger businesses. These changes are intended to streamline the relief by simplifying rules around subcontracted and subsidised work and help control the scheme’s overall cost.
The new scheme follows calculation for the RDEC. This provides a taxable credit of 20% based on the total eligible expenditure.
Loss-making, R&D intensive SMEs will continue to benefit from what can be considered the old rules, and they will be able to claim Enhanced R&D Intensive Support (ERIS) in order to claim a payable tax credit of 14.5% on losses surrendered.
What happens if a company has to pay back the R&D relief?
Our business recovery and restructuring team have been approached by an increasing number of companies that are being actively pursued by HMRC for ineligible claims and, in some cases, by the Fraud Investigation Service. In situations where these companies have not taken advice and the claim is determined to be ineligible, the R&D relief may need to be paid back, often with penalties and interest added into the total.
Another potential area that HMRC haven’t yet looked into yet is the condition that applies when submitting an R&D claim. Financial accounts will demonstrate that you are a viable going concern, not a going concern dependent upon the R&D claim being received, which could possibly be construed as a misfeasance on the part of company directors.
If companies that are faced with these penalties are also having cash flow difficulties, and do not have the resources to repay the demands of HMRC, an insolvency practitioner can advise on ways the business can consider restructuring to prevent them from becoming insolvent.
How can we help?
At PKF Smith Cooper, we welcome the direction from HMRC to clear up the scheme to ensure that bona fide claimants are benefitting. Our specialist R&D team understand the complexities of claiming Research and Development Relief and, alongside our Business Recovery and Restructuring team, we can help you avoid mistakes when making a claim. Contact us today to see how we can assist you and your business.
