Crackdown on R&D tax relief driven by BE case

The government has launched a crackdown on research and development tax
credit claims following the recent BE Studios case, which suggested companies
were claiming hundreds of thousands of pounds in R&D credits to which they
were not entitled.

HM Revenue & Customs has begun asking applicants detailed questions about
the R&D they are undertaking, and referring them to the details of BE’s case
as guidance.

In July a High Court judge ruled that software company BE Studios had claimed
£150,000 in R&D tax credits in error, a payment that would not have been
made had HMRC undertaken sufficient enquiries into BE’s case, the judge said.

Accountancy Age has seen a copy of a letter sent by a tax inspector
querying an R&D claim and advising the claimant to look at the BE case for

‘A fundamental point in that case was whether the scientific work carried out
by the company sought to achieve a scientific or technological advance, and form
the whole or part of a project to resolve scientific or technological
uncertainty. It was found that there had not been qualifying expenditure within
the DTI guidelines,’ the letter reads.

The case, it continues, ‘sets out the interaction’ between the various
guidelines relating to the credit.

Tax advisers said that the letter was unlikely to be the only one. Mike
Warburton of Grant Thornton said he expected that HMRC would have circulated
guidance on the case to tax inspectors.

David Cobb, an R&D tax credit expert at Deloitte, said he believed the
Revenue would have informed inspectors about the case, adding that it was
clearly using the case as ‘a warning shot.’

‘This case makes it clear that you need to do a certain amount of due
diligence on the credits,’ he said.

Warburton said the case had raised serious issues about the operation of the
tax credit, saying he thought the Revenue had simply been ‘waving these cases

The letter queries an application for the credit. It is unclear as to whether
or not HMRC has also begun to audit claims that it had already paid out on.

The system for assessing eligibility for the credits has been criticised for
not employing scientifically trained inspectors to assess claims. The Treasury
recently launched a review of the credits, one of chancellor Gordon Brown’s
flagship tax schemes. The BE case is likely to strengthen calls for the system
to be tightened up.

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