In the case of R&D Tax Credits, the saying – “Don’t abuse it, as you might lose it” – is becoming increasingly appropriate.
Background
The R&D Tax Credits scheme has been around for c20 years but has ballooned in recent years. It is a highly unregulated market, that inevitably attracts abuse because of its generosity. Up to 80,000 companies are now claiming, and claim value reached £6.3bn in 2018-19, an increase of 19%.
The amount of R&D expenditure reported by HMRC is now 64% more than total UK R&D!
This growth in claims has in no doubt been encouraged and facilitated by the emergence of a multitude of rogue R&D advisors and accountants pushing the boundaries.
“Poorly put together R&D claims” are one of the biggest areas of tax risk for the UK Exchequer.
However, this has not gone unnoticed by the Treasury, and recent national audit criticism of the R&D scheme operation has led to a seismic shift in HMRC’s approach to R&D Tax Credits and an industry-wide consultation on the future of the scheme.
HMRC enquiries are increasing in all areas
At least £311m of R&D Tax Credit claims are incorrect – HMRC is now taking action after Treasury pressure with:
- 100 new R&D Tax Inspectors staff checking R&D claims
- A revised risk screening claim review process and random enquiry programme
- The bigger the claim, the higher the risk – BUT even sub £10k claims are not immune
- 4,000-5,000 new enquiries per annum (7% of claims) – software will be higher, where HMRC has its own in-house specialists
- Submissions with no technical reports are being red flagged
- Claims prepared by HMRC’s growing ‘cowboy’ list are being red flagged
- DIY claims are also easy to spot
Nearly a half of enquiries will result in a ‘haircut’ – or worse.
Nudge letters targeting software claimants
Many software development companies that make R&D Tax Credit claims have recently received so-called “nudge” letters from HMRC reminding them that the Government’s definition of Research & Development is much stricter than many firms may believe.
Reference is made in the letter to non-qualifying projects which “apply routine software solutions to a new business area which, although bespoke, do not create an advance in the field of software development”. The “nudge” element of the letter urges claimants to amend their tax return if, on reflection, they believe they have filed an incorrect claim.
These letters are typically sent out en-masse as a campaign, reflecting HMRC’s particular concern over the abuse of software claims, traditionally seen as low-risk and attracting the attention of the new so-called ‘automated platforms.
Changes to HMRC interpretation of R&D legislation
When a law is enacted, it may be subject to possible different interpretations but these are resolved by the Courts.
A recent tax case covering subcontracting (s1052(5) CTA 2009) – R&D expenditure is not incurred in carrying out activities which are contracted to the claimant – offered considerable insight into the definition and interpretation of technical advances and uncertainty.
The Court took a strict view based on the legislation.
Due Diligence and Compliance is more important than pushing the claim value
The established, reputable advisors in this market have been saying this for some time – at last the market is listening. Getting control of this market is essential if we are to see it continue.
Nothing should be taken for granted!
