Call to prepare as HMRC ramp up investigations into R&D tax credits

Call to prepare as HMRC ramp up investigations into R&D tax credits

Businesses must get ready for HMRC’s clampdown on “spurious claims”, according to Justine Dignam, director of incentives and reliefs at Markel Tax

Call to prepare as HMRC ramp up investigations into R&D tax credits

HMRC announced this year it is to scrutinise the use of Research and Development (R&D) tax credits and the apparent failings within the sector. As a result, the tax authority has hired an additional 100 compliance officers to prevent abuse of one of the most generous tax credit schemes in the UK.

Justine Dignam, director of incentives and reliefs at Markel Tax spoke to Accountancy Age to explain how businesses will be affected, why it’s happening and what the consequences could be.

What are HMRC’s plans and how are they affecting businesses?

JD: Over the last 18 months, we’ve seen a change of tone from HMRC. Whereas before it was very much around the encouragement of businesses to claim the R&D tax relief, we’re now seeing a really strong message coming across. HMRC are very keen to get the right people claiming the right amount of money for the right kind of expenditure.

At the moment, it’s a bit of a free-for-all out there and HMRC is starting to recognise that.

The 100 compliance officers drafted into HMRC’s R&D team can mean only one thing: they’re going to start looking at cases with added scrutiny, which we readily welcome.

This isn’t a case of HMRC trying to claw back money, it’s more that they’re worried about the level of spurious claims. Is that correct?

JD: Absolutely. HMRC have got a responsibility to protect the public purse and as such, they’re obliged to stop any abuse of tax legislation. It’s quite apparent and acknowledged by HMRC that there are shortcomings in the application of the legislation currently.

Markel Tax has been operating in the R&D sector for 15 years so we’re often asked to review submissions that have been previously made and it’s really clear that the technical merits of the legislation are at best being misunderstood, and at worst, being abused.

We take our partnerships with our 4,000+ accountancy practices seriously, so – unlike some new firms entering the market – we pride ourselves on adhering to and supporting the guiding principles of PCRT, meaning we consistently hold ourselves to the highest ethical standards.

Who’s to blame? Is it the directors or is it the advice they’re getting?

JD: Ultimately, it’s the responsibility of the directors to show that all financial information declared truly reflects the business. Sadly, we often hear that advisors have encouraged and guided directors over what they should provide in the narrative to ensure an R&D claim is payable.

But just because HMRC has paid the money on a claim doesn’t mean they’ve accepted the claim. It just means that it hasn’t been selected for enquiry.

“We hear on a daily basis of clients believing that because they’ve been paid the money for an R&D claim, they believe they’ve had the seal of approval from HMRC – this is not the case.”

This is where the landscape is going to change. Hopefully, more and more claims submitted are going to come under further scrutiny.

Unfortunately, we are increasingly seeing huge amounts of R&D businesses across the UK that aren’t regulated (because you don’t have to be) telling clients that they can make a claim when clearly, they cannot. We see that on a daily basis.

For those directors who may have been slightly misled, what are the consequences they face now?

JD: In the event of an enquiry, I think we’ll see lots of businesses find their own advisors shy away from getting involved because they won’t have the right due diligence to defend it.

That’s serious for the client who is going to feel very vulnerable being put in front of HMRC to explain a submission that they don’t really understand.

The second part of that is enquiries can last for many, many years while the cost of defending yourself can cost thousands of pounds.

In addition, in the event of HMRC opening an enquiry, they’re not just going to look at the current year’s enquiry. They could go back as many as 20 years and open every single submission that’s been put in for R&D tax relief.

If it’s proven that your claim is spurious at best, you will be subject to penalties and interest in addition to having to pay the full claim amount back. The average claim in the UK is £57,000 – if you’ve been making a claim for 10 years, you don’t have to be a maths genius to see that you would have to find a very large amount of cash to repay this.

Are the professional bodies doing enough to protect directors from unethical advisors?

JD: Yes and no is the honest answer. There isn’t compulsory regulation for the R&D sector and therefore we’ve seen a huge influx of new providers coming into the market, taking advantage of the generous tax relief.

So, we feel there is a lack of regulation for niche providers. We would really favour an increase in regulatory governance around that, because this could be the next PPI disaster.

I think it will happen. It’s just when, not if.

How can Markel Tax help?

JD: We have a robust knowledge of the legislation processes that are required to satisfy HMRC and we’re committed to providing the technical expertise to ensure clients maximise their claim while remaining within the framework of the legislation.

We have a really talented team of experts, including financially qualified professionals who are CTA, ACA, ATT, as well as a team of PhD scientists, technologists and engineers to really make sure that we understand the sectors we serve. And we support over 500 accountants throughout the UK as their preferred R&D tax partner to ensure their clients are compliant.

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