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R&D claims: A fusillade of fraud accusations

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Andrew Park argues that HMRC is caught between acting as a facilitator in the government’s policy drive to encourage R&D spending and the need to police the R&D tax credit system to prevent increasingly widespread abuse.

20th Sep 2022
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“We are contacting you with reference to a recent claim made for relief . . . We continuously monitor systems and customer records to guard against fraudulent activity. The claim triggered an alert on our systems and has caused HMRC to believe that you have fraudulently claimed money to which you are not entitled.

“If you think you are entitled to this money, then you need to contact HMRC as a matter of urgency so that we can re-examine your claim.  If we do not hear from you, we will cancel the repayment claim.”

So begins a recent ‘one to many’ letter sent by HMRC fraud investigations service to claimants for Research and Development (R&D) tax credits.

How the letter is framed

The letter is seemingly unprecedented in being issued as an out-of-the-blue computer-generated fraud accusation by the HMRC fraud investigation service but within the context not of an investigation into underpaid tax – or indeed, of a civil or criminal investigation of anything – but the refusal of a claim for a tax credit unless further compelling information can be provided.

Regarding the possibility of future criminal investigation, the letter states:

“At this time HMRC has not opened a criminal investigation into this suspected fraud.  However, you should be aware that HMRC reserves the right to open a criminal investigation . . . any investigation could use as evidence anything you have said to HMRC about your claim . . . should you decide to contact HMRC . . .”

The way the letter is framed suggests HMRC is presenting claimants with a choice – accept rejection of the claim and walk away or risk possible criminal investigation.

HMRC is in a pickle

Taking a step back, HMRC has got itself into a bit of a pickle with R&D claims because the numbers have surged in recent years as the government has offered generous credits in its bid to take R&D to 2.4% of GDP whilst HMRC resourcing has failed to keep pace, and unscrupulous “advisers” – seldom professionally regulated – have entered the market cold contacting firms and offering to work miracles in return for quantum based commissions. 

HMRC is faced with a processing backlog – now exacerbated by putting extra checks in place to detect and combat equally embarrassing levels of fraud – which its latest annual report estimates at c. £0.5bn across the various tax credit relief schemes.

Such are the constraints on HMRC’s resources that it now no longer even pretends to investigate all suspected fraud – it was candid about that, for instance, in a statement on dealing with Covid support scheme fraud. 

Reliant on behavioural science

Instead, HMRC has become ever more reliant on behavioural science techniques and ‘one to many’ letters to trawl through data and nudge – either through frightening people into self-disclosure, educating them to get things right in the first place or, seemingly in this new evolution, to stop wasting its time and drop queue clogging claims it doesn’t like.

Clearly, when HMRC refuses an unwarranted claim, it prevents a loss of tax before it can happen – so it would be easy to assume that short of a particularly expensive use of resources pursuing a criminal punishment there is little else HMRC could do to punish a wayward taxpayer. 

However, that would overlook that HMRC’s civil tax-geared penalty regime is based not on actual underpaid taxes per se but on potential lost revenue – which includes losses which deliberate wrongdoing or careless errors could have brought about.

Plans to investigate

What is not clear is how many claimants HMRC plans to investigate civilly for making fraudulent or careless claims in order to raise penalty determinations – but judging by the volume of these latest ‘one to many’ letters, the answer is not many.

The letters don’t appear to preclude HMRC from doing so but by their very design one can infer that the tax department has concluded that it simply can’t spare its investigators to do it and is happy to settle for heading off unjustified claims at the pass and shortening its queues. That may be expedient in the short-term but hardly seems to be in the long-term public interest.

Imagine making a claim in good faith and then finding one’s business – and by extension oneself – on the receiving end of such a letter with such a blunt accusation of criminality: perhaps having enthusiastically diverted precious funds to R&D expenditure as a direct response to tax incentives offered by the government or perhaps relying too on prompt processing of the claim to keep up cashflow. 

HMRC’s ‘one to many’ letters have a track record of going not just to intended recipients with genuine compliance issues but also – because of false anomalies thrown up HMRC’s computer systems – to responsible and well-advised taxpayers with no case to answer. Having experienced such heavy-handed tactics those sorts of taxpayers will think long and hard before ploughing excess money into R&D again.

Replies (18)

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By jon_griffey
20th Sep 2022 17:30

I understand that HMRC have resourcing issues, but this can easily be resolved by outsourcing the job.
They could for example pay me say £1,000 to examine an R&D claim for them. I would be able to quickly report back 1 of 3 ways - (i) it is more or less kosher, (ii) it is over egged or (iii) it is BS. This would easily pay for itself and save them a fortune.

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Replying to jon_griffey:
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By Paul Crowley
20th Sep 2022 20:38

The big issue is HM Gov wanting to claim that UK Ltd is doing just so much R & D assisted by HM Gov.
It is as if there is a blind eye approach to the way the statistics are compiled and the real nature and validity of the research is a triviality compared with the grand figures for the politicians to showboat with

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Replying to jon_griffey:
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By Justin Bryant
21st Sep 2022 09:29

Yes, I have made similar suggestions here in the past to volunteer my services for a very modest cut of the tax (evasion) saving. No-one from HMRC has taken up my offer of course, despite HMRC having been warned on this website (and elsewhere presumably) by many people for many years about these cowboys.

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Replying to jon_griffey:
By ireallyshouldknowthisbut
21st Sep 2022 11:08

Yup, would be a doddle.

I will undercut you at £400 a pop.

I could do 3 in a morning and beat my daily billing target by lunchtime.

"O look its an architect, FAIL". Or, look its a web designer using standard tools. "FAIL". O look, its actually an new innovative product solving an actual problem that might reasonable exist, "thumbs up".

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By Hugo Fair
20th Sep 2022 19:41

I think the big point has been missed here ... it just so happens that this deleterious letter has been targeted at R&D claimants, but it could just as easily be used (without changing a word) for CIS - or anything else where the taxpayer 'status' is claimant.

“At this time HMRC has not opened a criminal investigation into this suspected fraud. However, you should be aware that HMRC reserves the right to open a criminal investigation . . . any investigation could use as evidence anything you have said to HMRC about your claim . . . should you decide to contact HMRC . . .”

"The way the letter is framed suggests HMRC is presenting claimants with a choice – accept rejection of the claim and walk away ... or risk possible criminal investigation".

How long 'til HMRC try this 'technique' on with other groups of taxpayers?
It is outrageous (and 'suspected fraud' a ludicrously wide description of an unquantified state)!

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By mhkay
21st Sep 2022 10:27

I've been claiming R&D relief for many years - at first I had to tell my accountants about the scheme and persuade them it was applicable - and it amazes me how informal the process is. Sufficiently so, that I think I would have considerable difficulty putting together evidence that my estimates are reasonable if challenged.

One of the weird things about the scheme is that you can only start benefiting from it once you are making a profit. How does it incentivize innovation if you only get the money once the innovation is already making money?

It's also strange that the government supports creating the innovation, but not marketing it. Surely it's been known for many years that our problem in the UK is that we're good at innovating and bad at marketing the result?

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Replying to mhkay:
By ireallyshouldknowthisbut
21st Sep 2022 11:04

eh? (1) your accountants sound poor if you had to tell them about this basic scheme which has been around for 20 odd years (2) they sound even poorer if you are claiming without evidence. This is possibly negligent on their part and puts you in some serious hot water. (3) you can benefit if you make losses. if they didn't tell you that either, who are these 'accountants'. Do they know what they are doing? Or are they bookkeepers playing 'dress up'? [no offence intended to competent bookkeepers]

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Replying to mhkay:
By SteveHa
21st Sep 2022 11:14

mhkay wrote:

I've been claiming R&D relief for many years - at first I had to tell my accountants about the scheme and persuade them it was applicable - and it amazes me how informal the process is.

In a previous life I've prepared R&D claims for clients. Whilst there may be some measure of you providing the necessary technical knowledge of your R&D to your accountants, I would argue that it is incumbent on your accountant to satisfy himself that both the reasons for, and the quantum of the claim are accurate.

I know that I have certainly turned around to clients and told them, "not a hope in hell".

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Replying to mhkay:
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By Hugo Fair
21st Sep 2022 11:51

I'd be worried about one or the other part of "I had to tell my accountants about the scheme and persuade them it was applicable."

If they were unaware of how the scheme operates, then that'd be a concern about the competence of the chosen accountant ... but if they were fully conversant and yet resistant to the concept of it being applicable to your company, then my bigger concern would be that you proceeded to make the claim.

It doesn't sound to me as though you are yet au fait with the scheme (for instance you can certainly claim whilst incurring losses - and the process, when properly followed, is far from "informal").
The fact (if that be so) that you have made a successful claim is no guarantee that you should have done - or indeed that HMRC may not later open an enquiry into it (like any tax return).

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By indomitable
21st Sep 2022 12:36

I would be worried about your accountants if you had to advise them about R&D claims.

And it appear you don't understand the scheme that well as of course loss making business can claim R&D credits and even get a tax refund in may cases

Not sure what you mean by informal above, but the onus is on the taxpayer to get it right in accordance with the legislation. HMRC's initial acceptance does not indicate approval on their part and they can come back and investigate years later if it was a 'frivolous' claim with all the potential consequences

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By indomitable
21st Sep 2022 12:19

Too easy in the UK to set yourself up as an "accountant" or "tax advisor" or "specialist tax advisor" Until the industry is properly regulated these problems will persist. The terms need to be legally protected and regulated properly.

As an aside this week one of my clients - a nursery - was approached by a so called expert R&D firm who claimed that they could submit a claim on her behalf! It was absolutely ridiculous.

The industry needs better regulation and the terms legally protected. But this I'm afraid is unpalatable to government

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Replying to indomitable:
By SteveHa
22nd Sep 2022 08:52

indomitable wrote:

Too easy in the UK to set yourself up as an "accountant" or "tax advisor" or "specialist tax advisor" Until the industry is properly regulated these problems will persist. The terms need to be legally protected and regulated properly.

Not this old chestnut again. Being a member of a PB is not a sign of competance, and not being a member is not a sign of incompetance.

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Donald MacKenzie
By Donald MacKenzie
21st Sep 2022 13:53

There are genuine, worthy, R&D claims - in the same way as there are football players worth what they are paid.
Most are not.
I have had several construction industry clients encouraged to apply by "advisors". These clients do NOT carry out RESEARCH or DEVELOPMENT; they build or install what they are told to build or install, following the processes laid down by clients or main contractors. Innovation would be frowned upon and see building warrants refused.
HMRC should be praised for FINALLY doing something to stop the rot.

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By Runagood Team
21st Sep 2022 18:10

HMRC should have attacked the fraudulent R&D claim industry years ago. I've been receiving patently crooked prospecting offers for ages

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By richard thomas
22nd Sep 2022 07:21

There is a lot I could say about this if I were not on holiday, but I throw in one suggestion for the reason HMRC are taking the line they are (illegal thought it may be) is that they cannot use Sch 24 FA 2007 as a tax credit is not a repayment of tax, and so there is no PLR.

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Replying to richard thomas:
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By richard thomas
23rd Sep 2022 07:49

Being in a holiday mood meant I overlooked that para 28(f) and (fa) of Schedule 24 treats a payment of tax credit as a repayment of tax, so the absence of a School 24 penalty power cannot be the reason for the approach set out in the letters.

It is in my view euphemistic to call these "nudge" letters: they are "Nat Lofthouse style shoulder barge" letters with the taxpayer ending up a crumpled heap in the back of the net.

Of course HMRC should come down hard on the dodgy claims and by criminal investigation far more than they do; and they should have been doing this years ago when the activities of the snake oil salesmen were mentioned here.

They say though that despite the fact the "HMRC believe" (though HMRC cannot have a collective belief, and more than it can make a collective discovery (Tooth)) that the claim is fraudulent they are not starting a criminal investigation. So what are they doing?

A fraudulent claim is one which by definition is dishonest, that is with the knowledge of the claimant that they are doing wrong. As the claim is, and must be, made in a return then HMRC has two options. One, it must (not may) pay the amount claimed to the taxpayer (after any set-off) - s 1054(4) CTA 2009. Two, it may enquire into the return, in which event it need not make the payment.

The letter does neither but simply says that if you don't contact HMRC they'll cancel the claim - but how? What mechanism allows that? None is the answer.

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By richard thomas
29th Sep 2022 21:39

Thanks to Andrew for bringing this letter to a wider public in this forum.

I agree entirely with Hugo that this letter is outrageous, and could be a forerunner of a wider campaign in many other areas where a claim is made. And not just claims – tweak the letter a bit and you get:

“We are contacting you with reference to your recent filing of a tax return. . . We continuously monitor systems and customer records to guard against fraudulent activity. The return triggered an alert on our systems and has caused HMRC to believe that you have fraudulently claimed a deduction or relief to which you are not entitled/omitted income you should have included in the return but did not.”

A particularly worrying point is the words “caused HMRC to believe”. HMRC means the totality of the Commissioners for His Majesty’s Revenue and Customs and the officers of Revenue and Customs, though of course HMRC can delegate or authorise officers to carry out HMRC’s functions.

When what is now s 103 FA 2020 “HMRC: exercise of officer functions” was enacted fears were raised about automating processes such as assessing under s 29 TMA, given a requirement for an officer to believe something or to exercise knowledge or judgment. The then FST, Jesse Norman offered warm words about safeguards and the distinction between responsibility for a decision and the execution of it by a computer, but it is difficult to know to what extent HMRC have used s 103 to justify changes in processes.

Assessment of penalties not involving an individual officer’s discretion are already automated of course, such as those in Schedules 55 and 56 FA 2009, whereas currently those under section 100 TMA, Schedule 24 FA 2007 and Schedule 41 FA 2008 are not, and require an officer’s intervention. That is true also for discovery assessments.

The relevance of this to the letter here is that it states clearly that the alert on the system, an automatic event triggered by an algorithm, has caused HMRC to believe that the claimant has *fraudulently* claimed a repayment (“has” it should be noted, not “may have”). If this means that an officer of appropriate rank and experience has considered the alert and the claim and come to a view that the claimant (not just the claim) must be fraudulent then so far, so good, though I do not see how they can be so certain just from the contents of a claim. If in fact the letter has misstated the position and the officer only believes that the claim *may be* fraudulent, that would assuage some doubts about the legality of the exercise (but raises other issues about whether any such mistake was accidental or malicious). But if the letter follows automatically from the alert, then it is deeply concerning as it is impossible to see how any feature of the claim that triggers an alert can of itself cause HMRC to believe that the claim must be fraudulent.

I have had some experience of this type of thing in an SDLT avoidance case (and see Wilby v HMRC a just published FTT case on SDLT). There are triggers in the SDLT computer system to spot likely avoidance, including a claim of a particular residual category being made and the name of the agent – an “indicative agent” (which I’m sure does not include Justin). But the purpose of this is to select cases for investigation, ie it is a risk assessment tool. It does not indicate to HMRC that there must be a tax loss to enable a discovery assessment, not least because often HMRC are at pains to say that that they were not aware of a tax loss until some time into an investigation in order to protect the discovery position.

So I wonder what the triggers here can possibly be. Use of a dodgy R&D claim factory is an obvious possibility, as is the type of business (where that is known to HMRC) but neither can be conclusive, unless HMRC have real proof of fraud in *all* cases by such an agent or in such a type of business. SDLT has it right – they are indicative.

And I wonder what notice HMRC have taken of the McComiskey case, where Heather Gething held that a claim to SEIS relief where the repayment was made to a dodgy firm who filed a return but were not authorised by McComiskey to act for him under a 64-8 could not be reclaimed from the taxpayer by a discovery assessment because he had not made the return.

This may be part of the reason for the unconventional tactics here. I agree entirely with Andrew Park (good name for a tax specialist) that HMRC resources are a major consideration. It is obvious that to mount criminal investigations of all triggered cases would be out of the question, even if Covid frauds were not a thing. So why not COP9 investigations? Resources again, plus the possibility that the claimants were ignorant of the frauds and did not authorise their submission or did not receive the credits, so making discovery assessments and penalties under Schedule 24 difficult. But COP9 is not really relevant in cases where, as with many? most? of these, the enquiry window is still open.

What they are left with then is to open an enquiry into the claim or to do what they have called a One to Many investigation (not “One too many”). The Compliance Handbook at CH600000+ covers this.

An enquiry is the obvious thing for HMRC to do, as although HMRC are under a general duty to pay the credit claimed (s 1054(4) CTA09) they are not required to make any payment if they open an enquiry except on a provisional basis as they think fit (s 1060(4) and (5)). So why are they not doing this? Or perhaps they are once they have had communication with the taxpayer. Yet it doesn’t need a conversation to enable HMRC to start an enquiry, so the thought must be, as Andrew suggest, that the conversation will take the form of threats and menaces unless the claim is withdrawn.
“Examine” is the euphemism for this.

It could be that in the course of any conversation HMRC open an enquiry. The relevant cases here are Portland Oil & Gas in the UT and Raftopoulou in the CA. These establish that a mere rejection of a claim on the ground that it is patently out of time is not the opening of an enquiry. But anything more than that, that goes beyond “light monitoring” (Langham v Veltema, referenced in Raftopoulou at [44]), might constitute the opening of an enquiry with all the resource implications that has for HMRC. So they would be treading a difficult path if they “re-examine” the claim as their letter suggests without opening an enquiry.

They are unlikely to be employing the correction provisions in paragraph 16 Schedule 18 FA 1998 (obvious errors) as any correction can be rejected.

What if the recipient of the letter does not engage with HMRC? “We will cancel the repayment claim”. And how will they do that? A claim has been made in a return, and therefore HMRC are under a duty to repay it, unless they open an enquiry and come to a conclusion that the claim fails – a matter for which they are required to give reasons and is appealable, like any other closure notice.

There is no provision that allows HMRC to unilaterally cancel a claim. HMRC have a habit of telling taxpayers who do not reply before a deadline set by HMRC where an assessment (eg a penalty) has been appealed that they have settled the matter under s 54 TMA, a legal nonsense which has been called out buy the courts and tribunals on several occasions.

I wonder if HMRC have latched on to the words in s 1054(4) “a claim for an R & D credit *to which it is entitled* for an accounting period” to say that they can reject a claim without formality because the taxpayer is not entitled to the credit. But this won’t do: the only way HMRC can check the entitlement is by enquiring into the claim.

I don’t want it thought that I am in some way sympathetic to dodgy R & D claims. They are a blight and a curse and divert HMRC from more useful activity, and dishonesty should be punished using either the criminal courts or by civil penalties. It may be tempting in the names of expediency to try and head dodgy claims off at the pass, as Andrew vividly puts it, but you can’t ignore taxpayers’ rights and in particular the provisions of Article 6 of the European Convention on Human Rights. As the Compliance Handbook shows, any case where HMRC are seeking penalties must be started by giving taxpayers factsheets on their rights under the ECHR. And in cases before the tribunals and courts, fraud must be specifically pleaded and in detail so that the taxpayer knows exactly what they are accused of and why.

This takes me back to the surprising content of the letter where they say that HMRC believe that fraud *has been* committed, ie criminal dishonesty without hearing anything the taxpayer has to say.

Again I agree that this is, as Hugo says, outrageous.

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Replying to richard thomas:
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By richard thomas
30th Sep 2022 14:10

Something that I forgot to put in my post above.

If the letter results simply from the computer spitting out an alert, then any recipient has the right under art 22 of UK GDPR and s 14 DPA 2018 to:

be told by HMRC that the decision has been taken based solely on automated processing, and

before the end of the period of 1 month beginning with receipt of the notification, to request HMRC to reconsider the decision, or take a new decision that is not based solely on automated processing (ie by a human being).

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