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Engineering firm fined for invalid R&D tax relief claim

An engineering firm has been fined £26,000 after a tribunal ruled the company had wrongly claimed nearly £57,757 in research and development tax credits.

29th Nov 2019
Editorial team AccountingWEB.co.uk
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An engineering firm has been fined £26,000 after a tribunal ruled the company had wrongly claimed nearly £57,757 in research and development tax credits.

Coventry-based engineering consultancy Teksolutions-Inc Limited [TC07456] claimed the tax credit on £398,000 losses accrued between February 2014 and October 2015, but was unable to provide any evidence of the R&D costs being incurred, a tribunal found.

All records had, according to the company director, been lost or destroyed. HMRC even tried to help recover the records using its powers, the hearing in Birmingham was told.

Following further questioning and correspondence with HMRC over 12 months from August 2016 to August 2017, it was found no costs had actually been paid. Instead, according to the judgment provided by HMRC earlier this month, the costs were merely accrued in the company accounts.

This was despite HMRC having previously informed the company that R&D credits could only be claimed if the qualifying spending had been paid at the time of submission.

This resulted in the company being given a significant penalty, as opposed to an R&D tax credit.

Nigel HolmesCase comment: Nigel Holmes, head of R&D technical operations at Catax 

“This is every company boss’s nightmare and there are key lessons to learn from it.

Firstly, it demonstrates the importance of good company record-keeping. If HMRC starts asking questions, it is vital you can provide them with the evidence of your expenditure and income in all its forms. If you have no evidence to back up your claims, you risk falling foul of HMRC and being penalised.

Secondly, it shows that HMRC is happy to work with companies, providing guidance where needed. Never be afraid to approach HMRC for advice where there is confusion or uncertainty just make sure you do then listen to them and follow the guidance given.

Thirdly, and most importantly, it highlights how important it is that companies fully understand the R&D tax relief system or seek professional advice before filing a claim.

While separate R&D records are not required, companies must be able to justify all their R&D costs and have paid them before claiming.

The basic principles of R&D tax relief are simple but, as with most tax issues, the devil is in the detail. At the very least, it is sensible to call in an expert to check or advise on the claim.

While it makes sense for companies to try and maximise the value of their claims, it is only with experience that businesses will get a thorough understanding of the different qualifying categories and costs, which enables them to do this with confidence.

Robust procedures need to be followed when working on R&D claims for good reason. The last thing any company wants is to have their claim for a tax break returned as a fine for claiming wrongly.”

Replies (9)

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By Sheepy306
02nd Dec 2019 12:42

So company commits fraud by submitting entirely dishonest R&D claim, accrues £400k non-existent expenses in accounts and presumably £80k CT benefit, avoids criminal prosecution. And that’s a good result for HMRC is it?

Would be interested to know who submitted the R&D claim, was it solely the company, with the help of their accountant, or a specialist R&D claims company? It’s about time that these ridiculous R&D claims were stamped out.

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Replying to Sheepy306:
By djn24
02nd Dec 2019 10:42

Sheepy306 wrote:

Would be interested to know who submitted the R&D claim, was it solely the company, with the help of their accountant, or a specialist R&D claims company? It’s about time that these ridiculous R&D claims were stamped out.


I've been dubious about some of these claims I've heard about and hope that HMRC really tighten up on this area of tax.
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Replying to Sheepy306:
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By hiu612
02nd Dec 2019 11:14

"We found Mr Quarm to be a deeply unsatisfactory witness who was willing to say whatever he thought would assist the Appellant’s case regardless of whether it was true or not"

Yep, hard not to conclude that he entirely fabricated that lot.

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By Justin Bryant
02nd Dec 2019 11:00

We all know that basically 80% of these R&D claims are dodgy, yet HMRC are more interested in scre wing homeless people for late tax return penalties etc.

If I were in charge of HMRC I reckon I could save at least £0.5bn immediately per year by simply challenging/blocking these dodgy R&D claims.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
03rd Dec 2019 12:00

What exactly do you mean by "these" claims? If you're referring to dodgy claims then, by definition, 100% of them are dodgy. If you're talking about claims in general then I challenge you to come up with evidence to support your 80% figure.

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By optimist
02nd Dec 2019 11:04

I think the analysis by Nigel should have commenced as:

"Firstly, it is important not to pretend that you have carried out R&D then claim tax credits"

HMRC should be having a field day on false claims. If this was one advised by a specialist R&D company, then I think HMRC should be reviewing the reports they have submitted and opening enquiries into all of them.

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By whitevanman
02nd Dec 2019 13:20

If you read the case report, I think it quickly becomes apparent that the business / director is in some financial trouble and the claim was obviously fabricated by the director (and did not involve a specialist firm as such). Even when HMRC enquired and he persistently failed to provide information / evidence, he nonetheless pressed for some of the claimed repayment. Desperate or a chancer or both? Either way, I do feel penalties at a higher level should have been charged (if only for the damn cheek). That said, any bets on the company being liquidated and HMRC left with a pyrrhic victory? It will not be the first or the last. Perhaps the next Chancellor needs to properly address that issue.

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Replying to whitevanman:
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By dwgw
04th Dec 2019 12:51

Agreed. I deal with a lot of R&D tax claims and the one bad debt I've had was a company for whom I secured a 5 figure tax credit payment (they were genuinely engaged in R&D). The director put the company into administration as soon as the money was received and phoenixed the business (pre-TAAR). I, and many others, got nothing. It isn't always the advisers at fault.

That said, whilst I'm glad no R&D firm was implicated in this case, I do think a clean up of the sector is needed. I turn down "opportunities" if I don't believe there was any R&D. One director asked me about reputational damage if their claim were to be rejected and I said it would largely be mine. What happened? He went to another firm (apparently with no such concerns) & they secured a tax repayment for him. The business was an employment agency & there was no discernible R&D.

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By peterdell
04th Dec 2019 11:05

When a person on £15k gets fined £1.3k for not filing a tax return on time, even though they may be due a repayment or no tax is due and then there is this.

If I overclaimed benefits of £10k I would be facing a custodial sentence.

This is fraud and for the amounts involved this person should be in prison.

Read this:

https://www.bucksfreepress.co.uk/news/16400657.stoke-poges-builder-malco...

Its worth a go £250K and you get a slap over wrist.

This government is about taxing the poor. It is a head shaking disgrace. How can any rational person think the tax system is fit for purpose.

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