HMRC R&D raid poses “significant risk” to accountants

A sharp uptick in the number of R&D claims being challenged by HMRC, coupled with stricter submission rules, could pose a significant threat to SMEs and their advisers, according to Justine Dignam, director of tax incentives and reliefs at Markel Tax.

Markel estimates that by the end of the year, investigations into R&D claims will have risen by 900% from levels seen in 2019. The research also indicates that approximately one in 25 R&D submissions is currently being targeted. The conclusions are based on analysis of its own fee protection insurance data and HMRC statistics.

With the lack of regulation in the R&D tax relief market, accountants must be on high alert to safeguard their clients against this, Dignam says.

“R&D tax relief is an unregulated market. There has been an explosion in providers misleading SMEs about what qualifies as R&D and failing to ensure that submissions sufficiently document a company’s eligibility to claim.

“We have seen instances of claims being prepared for restaurants simply developing a new recipe or care homes producing medication plans – things that any credible and professional tax adviser would immediately reject.”

HMRC in revenue ‘claw back’

Dignam goes on to argue that, with a swathe of dedicated R&D inspectors recruited in the past two years and a current total of 245, HMRC’s increased focus is a veiled attempt to “claw back revenue” and “boost receipts” in the face of economic turmoil.

But according to HMRC, the compliance frenzy is merely a reflection of its commitment to “tackling error and fraud in the R&D schemes”.

“We take a risk-based approach to compliance, which ranges from encouraging customers to self-correct errors in their R&D claim through to blocking payments where we suspect organised criminal attacks,” a spokesperson told Accountancy Age.

Compliance in the UK’s R&D market has been a prevalent topic in recent years. Figures included in HMRC’s annual accounts from 2021 report an estimated £469m in R&D-related error and fraud in the 2021-22 financial year – a 40% year-on-year increase.

In his inaugural budget as Chancellor in 2022, Jeremy Hunt attempted to disincentivise R&D fraud by rebalancing the rates, reducing the deduction and credit rates for the SME scheme and increasing them for larger organisation.

Further changes due to come into effect in August will seek to achieve the same result. Submissions must evidence the intricacies of the research and development at play, the baseline of technology, how it is being implemented, and to what degree it qualifies as a significant scientific or technological advancement.

‘Accountants must act now’

In addition, each claim will need sign-off from a designated officer of the claimant company. Markel’s Dignam explains that, should the company recommend third-party advisers that subsequently fail to defend a client in the event of an HMRC investigation, the accountant will expose their client to additional risk.

“Accountants must act now to protect themselves and their clients against the risk of an HMRC investigation,” she says.

“If clients have made a claim in the last five years that their accountant suspects might not stack up to HMRC scrutiny now is the time to engage expert and reputable support. Failure to do so could result in unnecessary risk and exposure to financial loss.”