HMRC announced last week that it has paused some Research & Development Tax Credit payments whilst it investigates a number of claims which are described as being “irregular”.
In a short statement, HMRC stressed that the majority of R&D relief claims are unaffected but said there will be some delays to its usual processing times to ensure that any abuse of the relief is prevented.
R&D claimants are asked be patient and not to contact the R&D helpline or mailbox to chase their claims.
The HMRC statement specifically references claims that may be “incorrect, inflated or fraudulent” and points out that claimants may be liable to pay a penalty if they are detected.
This announcement points to widespread general problems within the R&D scheme. An enormous increase in the number of R&D claims submitted over the last decade has been driven by a growing army of R&D advisors and accountants who have seen the R&D scheme as an easy win for companies, and particularly following the onset of the pandemic in 2020.
Even before the pandemic, HMRC calculated that the value of R&D claims for the year ending March 2020 would be worth £7.4 billion – an increase of 19% over the previous year. The number of claims submitted grew by 16% in the same period.
As an increasing number of R&D Tax Credit advisors frantically chase a decreasing pool of companies that are undertaking qualifying R&D, there has been a temptation for some advisors to push the boundaries of what is acceptable.
Some R&D claims are clearly inflated beyond all reasonable levels in terms of R&D expenditure and many more contain projects that don’t meet the qualification criteria for R&D.
However, Tuesday’s announcement seems more likely to indicate a deeper level of fraudulent activity. To make such a dramatic announcement that all R&D claims could be subject to a delay in processing and issuing a request for claimants not to contact them indicates that the scale of this particular problem is significant – and potentially not isolated.
Two possible scenarios present themselves.
Rogue advisory company
The first is that HMRC is targeting a specific R&D advisory company which they suspect may have been involved in widespread abuse.
There is a precedent for this. In 2019, one Manchester-based R&D advisor was the subject of an HMRC investigation for persistent poor performance and non-compliance which resulted in up to 50 of their R&D claims per month being rejected. Whilst the investigation was ongoing, all payments connected with this advisor’s claims were frozen with the company entering voluntary liquidation in 2021.
It is known that HMRC is keeping a close eye on certain advisors and that bad behaviour by some companies has led to the new requirement that in future all R&D submissions will need to include details of any agent who has advised the company on compiling their claim.
The fact that HMRC has gone to the trouble of issuing the statement suggests that they have considerable resources tied up in this investigation. This could mean that the company involved may be the advisor on a large number of claims or that the investigation is targeting more than one company.
Large-scale fraud
The second potential scenario is that HMRC has identified a specific attempt at large-scale fraud within the system.
This would not be the first time that the R&D scheme has been the subject of fraudulent activity.
Three men from the West Midlands were jailed in 2020 for their part in an attempt to fraudulently claim £29.5 million in R&D Tax Credits for a fake healthcare IT project involving two countries in the Middle East. Software development costs of £137 million were found to be bogus.
Kath Doyle of HMRC’s Fraud Investigation Service commented at the time that “HMRC will continue to create a level playing field for law abiding businesses by rooting out the minority who seek to abuse these schemes, as this result clearly shows”.
Whilst the healthcare IT scam was an isolated case, HMRC may have identified what it sees as loopholes which are being persistently taken advantage of and therefore have decided to take action across the board.
Whatever the rationale behind yesterday’s announcement, it serves only to highlight the importance of strict compliance with the regime.
Thanks to Rufus Meakin – MSC R&D Sales Associate and specialist in large R&D Tax Credit claims; Industry-leading seller of R&D Tax Credits since 2005.
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