Recent months have seen an extraordinary increase in the number of HMRC enquiries into R&D Tax Credit claims.
Tech start-ups and software developers appear to be a specific target for HMRC, with most enquiries questioning the presence of a genuine advance in science or technology.
One case that has recently been brought to my attention is particularly troubling due to the circumstances whereby a promising tech start-up was lured to the UK by the Department for International Trade (DIT) in 2018.
The company initially had strong reservations about the levels of the UK ecosystem maturity, specifically the quality, availability and cost of software development resources in the UK.
However, following a sustained campaign by the DIT to secure investment for the UK, the business finally agreed to set up its global HQ in London in 2019.
The stability of UK government policy, as well as the easy-to-navigate R&D Tax Credit system for SMEs were both touted by DIT as key reasons why the company should choose the UK over Singapore or the USA.
The move was initially successful and in 2020 the company was included by DIT in the daily Number 10 Prime Minister business briefing as a great success on how to attract global Fintech by the DIT, having created 50 highly skilled ‘future industry’ jobs in 18 months and with plans to create another 50 positions over the next 18 months.
Two successful R&D Tax Credit claims were made and the business was happy that it had made the right decision. The problems began when HMRC opened a compliance check into its third R&D Tax Credit claim.
In my article, I interview the company’s founder to find out what went so badly wrong.
The company wishes to remain anonymous to avoid any potential repercussions from HMRC so the name has been changed for this article.
Rachel’s story
I spoke with the founder and asked her about the experience of relocating to the UK and the impact that the HMRC R&D Tax Credit enquiry has had on her business.
“At the outset, we committed to start a company in a knowledge-intensive industry of the future: Fintech. We’re trying to create new markets and new value that doesn’t currently exist. This is at least 10 times harder than starting a business in an established industry.
“You don’t go into this lightly and when you do invest you know that it will take everything you’ve got to create a truly global company.
“We started out overseas but as far back as 2017 I was scouting for other locations and looking at which countries would be the best global headquarters for us. We narrowed it down to shortlist of three: Singapore, the United States and the UK.
“Financially, we would have been much better supported in Singapore whilst the US has the advantage of being in the world’s biggest Fintech market. My initial thoughts were that we would end up in the US. However, when we’d completed our research, we were surprised to find that it actually came in third place, behind both Singapore and the UK.
“The UK has significant financial market access and innovation advantages over Singapore, which was a crucial factor, but having used the equivalent of the R&D Tax Credit scheme elsewhere we understood the beneficial impact this could have on cashflow management which is critical when you’re pre-revenue and investing heavily in R&D.
“Most importantly, as a business, we needed to have a clear and consistent strategy for reliable cash flow management.
“In the end, it’s not about whether or not you get more investment from a particular government or the availability of “free money”. It’s actually about consistency. We would definitely have raised more money earlier by moving to Singapore but we chose to relocate to the UK partly because of the stability in Government policy that we were promised in discussions with the DIT.
“Reliable financial support through the R&D Tax Credit scheme was a significant factor in why we decided that the UK was the overall best place to set up the company.
“In 2019, we started to raise a significant amount of money. We successfully attracted significant inward investment into our now UK-based company, which enabled us to hire a lot of staff in the UK.
“To support our development, we were relying on a number of what we thought were dependable mechanisms in terms of managing the growth of the business. R&D Tax Credits were a key component of our cashflow plan – because we believed the scheme to be consistent and dependable.
“Things were going well until HMRC opened an enquiry into our 2022 R&D Tax Credit claim.
“Having been successful in our previous two R&D claims, the lengthy and protracted enquiry into the 2022 claim has been challenging for the business because of the uncertainty it creates. The enquiry process has been exceedingly long and complex with repeated requests for information that replicate what we already provided in the original submission.
“Clearly HMRC had not even bothered to read the information submitted. To date HMRC have refused to schedule a single conversation or respond directly to a any question from us in 12 months.
“The sheer lack of understanding by the HMRC compliance team regarding the basics of the software development process, let alone the inaccurate citing of the R&D scheme guidelines, is shocking.
“We filed our R&D claim a year ago and were led to believe it would be processed within two months’ (like previous claims).
“We’re in a situation now where we we’ve had to rethink the entire future growth assumptions of the company as a result of uncertainty around the R&D scheme. The fact that we submitted a claim a year ago and the enquiry is still ongoing is surprising. We hear back every three months or so with the message they still have not processed the enquiry. This situation is totally unacceptable to any entrepreneur looking to invest in a new opportunity.
“HMRC has demonstrated that we can’t depend on the UK being a stable business environment so we’ve decided to close our UK R&D labs and move the jobs overseas, with the loss of all R&D jobs in the UK.
“The UK was always more expensive, and we needed to provide more training to staff when compared to other locations. Logic now dictates that the RoI is no longer there for us to justify continued investment in upskilling the UK workforce.
“The R&D Tax Credit was a genuine incentive for us to try and build the platform in the UK but because of the uncertainty and the way that HMRC is treating companies like us with these enquiries, like we are criminals, the future of the UK as a destination for technology starts-up has to be brought into question.
“For the UK, it’s tragic that an industry that promises to generate so much future value will be driven away and lost. The ‘by stealth’ but clear U-turn of policy combined with the gross mismanagement of the process by HMRC is resulting in job losses and is making the UK a much less competitive environment, not just for Fintech, but for tech start-ups across the board.
“Instead of encouraging and investing in some of the most promising sectors of the future, our experience suggests that the UK is actively harming its brightest prospects for economic growth. This is mind-bogglingly stupid.
“The tragedy is that we have already created over 100 jobs in the UK and had planned another 50 in the near term. With this HMRC U-turn, we are now anticipating less than 25 UK people here long term, and none in R&D.
“Entrepreneurs rely on the stability and consistency of any commitment of support from the Government. The convoluted R&D enquiry process that we’ve had to go through has taken so much resource to deal with, with poor or even no communication, and no resolution in sight. It is so frustrating because, at the end of the day, it’s an entirely valid claim.”
An R&D Tax Credit expert’s view
Dr Guillaume Peersman, a PhD Computer Scientist at MSC R&D with 16 years’ experience of preparing R&D Tax Credit claims, worked with the company on its original R&D claim and believes that the HMRC enquiry is seriously flawed and has no basis.
Dr Peersman said “I am deeply shocked at how this enquiry has been handled by HMRC. This company produces best-in-class R&D with immensely qualified engineers. They lead their industry and deliver complex as well as highly innovative solutions.
“If HMRC is saying that they cannot make an R&D claim, then consequently virtually no software company would ever be eligible for R&D Tax Credits. This is a scandalous misrepresentation of the rules of the scheme, and I’m not surprised that the company is leaving the country.
“Given the initial effort that went into encouraging it to relocate to the UK, it would be interesting to hear whether the Government is aware that HMRC is sabotaging the policies that aim to create a global Fintech hub here in the UK”.
Conclusion
Having listened to Rachel’s story, I felt it important to draw attention to a specific case where an ill-conceived HMRC enquiry has directly contributed to a technological leader in its field moving R&D investment overseas.
It appears that the actions of HMRC in this R&D Tax Credit enquiry have frustrated both the intention and the correct operation of the R&D scheme instead of facilitating it.
This case clearly demonstrates the far-reaching negative effects that a poorly conducted HMRC enquiry can have.
UK SMEs are facing a perfect storm in terms of the effects of post-Covid, international unrest, Brexit and an economic downturn.
The fact that the Chancellor announced major cuts to R&D Tax Credits in the Autumn Statement under the dubious cover of “combatting abuse and fraud” but giving SMEs only 4 months’ notice to prepare for the changes was bad enough.
The added insecurity of arbitrary compliance behaviour from HMRC risks further undermining UK innovation with serious long-term consequences for the economy.
Content by Rufus Meakin (R&D Tax Credit Insider Newsletter)
Find the full article here
