The UK Government has announced a big shake-up in the way that R&D Tax Credit claims are to be filed. In recent years, the R&D scheme has been plagued by a growing number of rogue advisors and accountants who encourage companies to submit spurious R&D claims which contain little or no qualifying R&D activity. The proportion of staff time supposedly spent on resolving technological uncertainties is often inflated to wildly implausible levels, with entire teams supposedly being engaged in R&D activities for 100% of their time in an attempt to maximise the tax relief on offer.
With UK debt at record levels, the Government is now firmly targeting the obvious abuse and error within the R&D scheme and is attempting to get things back on track to deliver on its aim to drive more R&D activity in the economy.
That the scheme is failing to deliver is no longer in doubt. The latest statistics from HMRC show a 16% increase in the number of R&D claims submitted for the year ending March 2020, when a record £7.4 billion in support was claimed, up by 19% on the previous year (£6.3 billion). Furthermore, both the SME and RDEC R&D schemes are forecast to continue growing with the OBR predicting that the amount of R&D reliefs claimed will increase from £7.7 billion in 2021-22 to a whopping £11.9 billion in 2026-27.
In theory, this should be good news. However, whilst R&D tax relief was claimed on £47.5 billion of qualifying R&D expenditure, only £25.9 billion of R&D was recorded by the ONS as actually taking place in the entire UK economy over the same period.
This mismatch is a major concern to both the Treasury and HMRC and is an indicator that the scheme is being exploited by unscrupulous advisors who prey on companies that undertake little or no R&D and encourage them to make bogus claims.
The overall value of the R&D scheme for SMEs is increasingly being questioned. The latest evaluation published by HMRC shows that the SME scheme only generates between £0.60 and £1.28 of additional R&D expenditure for each £1 of tax relief claimed. With such low levels of additionality, there is a danger that the Government will begin to view R&D Tax Credits as a “deadweight” in economic terms, meaning that the R&D regime is effectively subsidising spending that would have happened anyway.
Within this context, many R&D advisory firms are still pumping out absurd marketing messages with assertions that “95% of companies are still not claiming R&D Tax Credits” and the current number of R&D claimants is “just the tip of the iceberg”. One R&D advisor actually went public with the mindboggling suggestion that HMRC is sitting on a “£84b pot of unclaimed R&D Tax Credits”.
Clearly the bullish marketing rhetoric of many in the R&D advisory field does not match up with the reality as a new report published by HM Treasury makes clear. This report, which is a response to the industry-wide Spring 2021 R&D consultation, states that “concern over abuse and boundary-pushing involving R&D Tax Reliefs has grown in recent years” and that “the government is considering further measures, in particular, to discourage unscrupulous agents from exploiting the SME scheme”.
These new measures announced by the Treasury are designed specifically to tighten up on claim compliance, namely:
- all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally
- these digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
- each claim will need to be endorsed by a named senior officer of the company
- companies will need to inform HMRC, in advance, that they plan to make a claim
- claims will need to include details of any agent who has advised the company on compiling the claim
Particularly intriguing is the requirement that R&D claims should include the name of any R&D advisor who has been involved in the claim compilation. There is anecdotal evidence that HMRC has a list of potentially rogue advisors which it believes may be abusing the system and this information may be used to target persistent offenders. This could be particularly damaging to certain R&D advisors who use aggressive marketing methods to target existing claimants with the promise to increase the value of a previously submitted claim. For instance, how will HMRC view an amendment to increase an R&D claim that was initially prepared by a reputable advisor?
Also of interest is that a “named senior officer of the company” will in future be required to endorse any R&D claims submitted. The impression given here is that HMRC is fed-up with companies that resort to blaming their accountants or R&D advisors for errors in their claim and this that new measure will force companies to take responsibility for their own R&D claim and consider very carefully what is being submitted in their name.
This measure will also hit the devious type of advisor who won’t allow the claimant to see details of the R&D claim that has been submitted in their name. Unbelievably, this secretive practice is still widespread in the R&D advisory market.
The new requirement that companies must submit written details of why the R&D is qualifying is welcome – and long overdue. It has been obvious for some time that the enormous growth in lower-value R&D claims has been in part driven by advisors confident that smaller claims would “slip under the radar” at HMRC and that supplying any supporting documentation would only serve to alert HMRC to the dubious nature of the R&D qualification. This step will be seen by most R&D advisors as a very positive step as it is a means for reputable firms to add value to their service.
These new measures will be welcomed by most companies involved in preparing R&D Tax Credit claims as they genuinely want to do the best for their clients within the rules of the scheme.
For the boundary-pushers, and those who take advantage of the subjective nature of R&D qualification to submit spurious claims, this new Treasury report will hopefully make for uncomfortable reading.
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.
