HMRC's R&D crackdown discourages legitimate claimsby
HMRC’s crackdown on the abuse of R&D tax relief claims has resulted in the tax authority rejecting legitimate claims by small and medium sized enterprises, says the Chartered Institute of Taxation.
The Chartered Institute of Taxation (CIOT) has raised concerns about HMRC enquiries into small and medium enterprise (SME) R&D tax relief claims, saying that valid claims are being rejected, and businesses that do challenge HMRC “meet a brick wall” and give up on their claims.
“The result is a breakdown of goodwill and trust between HMRC and taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs,” Ellen Milner, director of public policy at the CIOT has warned in a letter to HMRC.
HMRC’s crackdown on R&D claims comes after the tax body estimated last year that the level of error and fraud relating to R&D tax reliefs had hit £469m for the year, up from £336m in 2020–21.
While the CIOT’s Milner agreed that HMRC should take appropriate and proportionate actions to prevent abuse of the R&D tax credit system, she added that the current approach is "discouraging legitimate SME claimant companies from making a claim because the likelihood of having to defend an enquiry means it is not cost-effective to do so”
Volume compliance approach
The tax body pinned the blame on the ‘volume compliance’ approach. The CIOT cited concerns around the “seeming lack of basic understanding of the R&D SME regime and the level of competency of [HMRC] caseworkers” and a “lack of engagement with taxpayers and their agents”.
The CIOT acknowledged that HMRC is “systematically finding problems”, but expressed worry that the approach was not “giving a fair reflection of what is actually happening” and is “at the detriment of genuine R&D tax relief claims”.
It said that the compliance teams are taking aggressive positions and are refusing to have conversations with agents and the delays in issuing formal appealable decisions is making it difficult for businesses to defend their claim.
The tax professional body said some of the claims HMRC has deemed as incorrect are valid, but taxpayers have ended up abandoning their efforts because of the costs associated with defending the claim.
Milner concluded that the volume compliance approach is not suited to R&D enquiries, and a better approach would be “meaningful engagement between HMRC and taxpayers to ascertain whether there is an R&D project in accordance with the guidelines”.
Another issue flagged in the letter was HMRC inappropriately applying penalties where it considers no R&D has taken place.
The CIOT said it is appropriate for HMRC to consider penalties, but the conclusions being reached by the tax authority demonstrates a “lack of understanding by the Individual and Small Business Compliance (ISBC) team as to the established law around penalties”.
The letter printed two examples of where HMRC considered the claim to be careless behaviour. One letter from HMRC to a claimant said:
“You failed to adequately consult HMRC’s guidance at CIRD8000, you relied upon advice given by a third party and did not contact HMRC directly, before submitting your claim to R&D tax relief. I have therefore, been unable to conclude that reasonable care was taken when you submitted your claim to R&D tax relief in your tax return.”
“The disclosure was prompted because you did not tell us about the inaccuracy before you had reason to believe we’d found out about it, or were able to find out about it. For this careless inaccuracy, with prompted disclosure, the minimum penalty percentage is 15% and the maximum penalty percentage is 30%.”
However, the CIOT argued: “We do not accept that carelessness can arise on the basis that the company did not consult HMRC ahead of making an R&D claim. HMRC’s manuals, and case law, speak of what a prudent and reasonable person in the position of the taxpayer in question would do.”
In response to the letter, an HMRC spokesperson told AccountingWEB: “We are committed to tackling non-compliance in the R&D schemes, which is why we have more than doubled resources dedicated to tackling abuse of the schemes.
“Our overarching compliance approach is to direct resources where they make the biggest difference. Therefore, we step up activity if we see increased non-compliance in an area, such as in R&D tax reliefs. We undertake a range of interventions from encouraging customers to self-correct errors to blocking claims where we suspect fraud alongside our usual enquiry processes.”
To address the concerns of the rise in R&D fraud and the media scrutiny from businesses taking “free cash” from HMRC, the tax department sent more than 2,000 nudge letters to businesses earlier this year to encourage them to check their previous claims are complete and correct.
There is further change still to come with the introduction of the Additional Information Form next month, which requires additional information to support R&D tax relief claims.
HMRC’s inability to police it effectively
Mike Dean, co-founder and managing director of WhisperClaims, told AccountingWEB the main reason for the rise in fraud was “not the structure of the scheme itself but HMRC’s inability to police it effectively”.
“The knee-jerk reaction to that, in what seems to be a largely politically motivated attempt to show some progress on tackling fraud, has been to launch a number of very high volume one-to-many letter campaigns to claimants, mostly using threatening language that is putting many SME owners off claiming at all," said Dean.
“If they progress beyond the stage of handling these letters, claimants and their advisors are then confronted with anonymised communications, unanswered or non-existent helplines and no direct access to inspectors. Couple this with communications that indicate that previous letters and comms have gone unread and threats of penalties and you have a very concerning situation."
Dean added that businesses are being “squeezed out” of a benefit designed to encourage innovation and grow the economy through unnecessary bureaucracy and political pressure.
“I have no doubt that later in the year HMRC and Treasury will be reporting that their actions will have had a positive impact and that new legislation and new HMRC behaviour has resulted in net savings through a squeeze on the scheme - what this will fail to recognise is the fact that large swathes of legitimate claimants will no longer be using R&D tax claims as a lever to increase innovation and thus grow our economy.