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HMRC's R&D crackdown discourages legitimate claims

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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.

12th Jul 2023
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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”.

Penalties

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.” 

HMRC clampdown

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.

Replies (21)

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By ireallyshouldknowthisbut
12th Jul 2023 15:18

I find this hilarious

"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"

I dot believe there is much evidence that the "ambulance chasing" claims industry promotes R&D given, by definition, the R&D (if it exists) has arisen due to a business case which existed prior to the firm knowing such claims existed.

its just "free cash".

I think I have only twice done planning with a client on R&D which actually depending on the claim going through. Oddly enough we did all the preclearance stuff and checked with HMRC BEFORE cash was spent. All other claims where "tack on" claims along the lines of, that software you built, it might be R&D......

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Replying to ireallyshouldknowthisbut:
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By Hugo Fair
12th Jul 2023 21:15

Quite.
Asking the opinion of the owner of "cloud-based R&D tax credit software" on this topic is akin to asking a Leopard whether it's a good idea to protect gazelle from carnivorous attacks.
[The opinion is valid but hardly illuminating].

Considerably fewer than 10% of the claims that I've ever seen had any real merit (whether or not they could be retro-fitted to squeeze past the minimum criteria for a claim).
And, although I'm aware that it's not part of those criteria, it was noticeable how few went on to be made/used even within the organisation (let alone sold in the open market).

Innovation that leads to growth in the economy is driven by bigger factors than a tax credit!

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Replying to Hugo Fair:
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By Hugo Fair
12th Jul 2023 21:21

CIOT have valid questions about both the attitude and behaviour of HMRC.

But the real (and big) issue isn't the treatment of submitted claims, it's the swarm of piranhas voraciously finding/creating the claims in the first place.

As always, HMRC are failing to tackle the source instead of the easy-to-ignore (i.e. taxpayers).

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Replying to Hugo Fair:
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By RandDTaxUK
13th Jul 2023 13:19

If only 10% of the claims you have seen have merit then. You either have a particular concerning group of clients. OR you have no idea how to judge this. What is your ACTUAL experience of undertaking R&D that you think makes you an expert. Because mine is 187 areas of engineering qualification and 20 years of running R&D projects with budgets over £1 billion BEFORE I started undertaking R&D Tax claims where I have lectured to teams all over the world including the longer running regimes in Canada and Australia. Whilst I note and frequently take to task that there are ambulance chasers, idiots and liars with false backgrounds recently infiltrating an industry that I have worked at the highest level in for 20 years (after my engineering management 20).

It is also not helped by ignorant bystanders with a little knowledge stirring the still less knowing public.

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Replying to RandDTaxUK:
Stepurhan
By stepurhan
13th Jul 2023 14:06

RandDTaxUK wrote:

If only 10% of the claims you have seen have merit then. You either have a particular concerning group of clients. OR you have no idea how to judge this.

OR they have a client base that is not suited to R & D claims that have been told otherwise by unscrupulous claim companies.

Because it is a matter of fact that there have been plenty of unscrupulous companies in this field. Being abusive to other site members and making grandiose claims of your own experience (got any external links to verify those that aren't just your own website?) is not exactly helping your own image in this regard.

Perhaps stick to arguments about how to deal with HMRC's dramatic overcorrection and skip the ego trips and personal attacks?

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Replying to stepurhan:
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By RandDTaxUK
13th Jul 2023 15:29

If you had a clue about R&D Tax you would know who I am and not to pick this argument. Suffice to say I would need to forget 99% of my experience before I would need to take R&D Tax opinion from you. As for advice on how I should or shouldn't criticise people. When you've trained most of the Big4 Partners in R&D Tax. (Steve Blacker of KPMG feel free to say I did not recruit you as a manager to the R&D Team and train you in 2005) Then you come back and feel free to give me advice. Until then....go away 'junior'.

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Replying to stepurhan:
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By RandDTaxUK
13th Jul 2023 15:30

If you had a clue about R&D Tax you would know who I am and not to pick this argument. Suffice to say I would need to forget 99% of my experience before I would need to take R&D Tax opinion from you. As for advice on how I should or shouldn't criticise people. When you've trained most of the Big4 Partners in R&D Tax. (Steve Blacker of KPMG feel free to say I did not recruit you as a manager to the R&D Team and train you in 2005) Then you come back and feel free to give me advice. Until then....go away 'junior'.

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Replying to RandDTaxUK:
Stepurhan
By stepurhan
14th Jul 2023 08:52

RandDTaxUK wrote:

If you had a clue about R&D Tax you would know who I am and not to pick this argument.


If you knew anything about how forums work, you would know that anyone can join with any name and claim anything.

You want to be respected, show respect to others. As it stands, I am ever more convinced you are part of the dodgy R & D market that has led us to this. All your belittling and abuse of those who are simply pointing out that such companies existed only serve to reinforce that view. You're only trashing your own reputation here by pursuing this stance.

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Replying to ireallyshouldknowthisbut:
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By RandDTaxUK
13th Jul 2023 13:08

You really should know something at some point, about something. But I have yet to see anything other than ignorance. So apt name if nothing else.

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By Self-Employed and Happy
13th Jul 2023 10:28

All this article needed to state was

"HMRC R&D team completely lack the expertise needed to satisfactorily regulate this area, this revelation brings them into line with most other departments of HMRC"

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Replying to Self-Employed and Happy:
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By RandDTaxUK
13th Jul 2023 13:10

In summary probably true. But a summary doesn't solve the problems. Which is why I have explained more of what they are and how they could be fixed. Because this wasn't a problem 2006 - 2009/10 and it needn't be again.

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By RandDTaxUK
13th Jul 2023 13:06

Whilst that is no doubt part of the problem, I am afraid part of the issue runs deeper in HMRC than the current "response to abuse". Since "revised" (and incorrect) training was provided to HMRC personnel in 2010 there has been a tendency towards adopting errors in that training. I would note it was a bad idea to adopt training written by somebody with ZERO Industry experience in R&D (being told what to do as an engineering Cadet, etc doesn't count). The person writing the previous training had 20+ years product development and automotive launch experience in £1bn+ projects. This was selected by the original HM Treasury and HMRC Consultation committee from a presentation given to them in 2005. I wrote it, my then colleague at Deloitte Micah Levy presented it along with items HMRC wanted to understand on Software, Micah's area and why they wouldn't pay Deloitte's rates for both of us to present when training the HMRC Unit Inspectors, who included the until recently retired unit leaders.

The issues with the revised HMRC position, which does not align to the legislation is it includes such errors as:
- You cannot claim R&D credits because you are doing this for the benefit of your own business. This is shoddily (if you know what you are doing) incorrectly justified to a misrepresentation of the legislation. But also shown wrong by almost every example.
- You have not developed a new 'method' for applying your R&D. Incorrect and proven so by multiple examples.

I could go on for pages - but unlike the person doing the 2010 training who now tells people he can train them with 291 minutes of videos (still blind leading the unknowing) even without them having any technical understanding. We would have demanded at least 7 years Industry experience in Deloitte (preferably as I had 20 years).

So how does HMRC expect non technically qualified / experienced persons to make correct judgements with one days training provided by someone who at best these days received the sub-standard training from 2010. They need proper training. Inside a week I or some out of the multiple Big 4 R&D Tax Partners who also undertook the training I wrote (and worked for or alongside me at Deloitte) could provide these R&D Inspectors with correct understanding.

They would not be experts, but they would know the correct borders of eligibility and how to establish whether a competent professional has been told / taught properly how to map their work to the true borders of the legislation.

Another issue is we have advisers calling themselves "Specialists in HMRC Compliant R&D Claims" They could call themselves that it they claimed zero. Given posts on linked in recently and also this issue of HMRC rejecting valid claims. Some of them are effectively ' not putting in' - claims they have incorrectly considered to be zero. Or which are much lower than they should be.

Can I evidence this? Yes though not with quite as big examples recently I encountered the detail of a claim in 2010 where I had since 2003 been telling the large co claimant they were claiming too little.
This had been audited by one of the worlds largest auditors (before they had an R&D Tax Partner I had trained) and HMRC for 6+ years at significantly less then £500k of eligible. It was increased to over £200 million of eligible agreed with an Inspector who was "HMRC Technical Lead". So a note of warning ANYBODY can do an "HMRC Compliant claim" by making it far too low. And with HMRC incorrectly rejecting claims on incorrect basis noted above where do these "shrinking violet" R&D advisers go next? "Reduce the claim Inspector? Certainly." Or "No, your position does not comply with the legislation and you are thus artificially restricting the claim due to your being provided with incorrect understanding. Please consider X, Y and Z which prove your position incorrect.

It is one thing picking a fight you cannot win (or do not know how to) it is another backing away from a position where you are correct and justified just because somebody knowingly or ignorantly tries to bully you. 'Somebody' in HMRC or HM Treasury or BEIS knows these HMRC positions are incorrect and it is about time they took the right steps or enlisted the skills to correct it.

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Replying to RandDTaxUK:
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By Self-Employed and Happy
13th Jul 2023 14:20

"291 minutes of video"

Christ, I genuinely think I spent that long deliberating the only R+D client CT Return I had, in the first year especially.

HMRC is a civil service led organisation bowing to political pressure when needed, HMRC won't pay to hire good staff, they won't pay for the correct training, they'll continue to [***] money up the wall on low skilled call operators who just refer anything remotely complicated into a waiting list for an incompetent team.

Sunak talked of investment in HMRC, it won't make a blind bit of difference unless you get skilled people in the building.

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Replying to Self-Employed and Happy:
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By RandDTaxUK
13th Jul 2023 14:37

I am not surprised you spent that time on it. But you can now be a "total expert" for 291 minutes of your time. Provided you pay his "society" several hundred pounds a month so he can help you make underclaims.

Regarding what they will pay. I have offered to provide training to them at their conference for free before.

Given that former colleagues managed to 'sell' themselves to top 10 firms as R&D Tax Partners (this was in 2005-8) after an hour of one of my "Advanced Manufacturing Business School training session " [The ones in the Big4 did get much more extensive training]. then it would as I noted not get them completely there. But they would not be making the blatant errors they are making now.

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By [email protected]
13th Jul 2023 13:27

It is our experience that for the smallest business there is no longer any option to claim as companies which would have managed their claims in the past, now set minimum amounts which they are willing to submit claims for.

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Replying to [email protected]:
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By RandDTaxUK
13th Jul 2023 13:52

Sue makes a very good point. The burden for submission information has increased and with HMRC making these incorrect attacks, especially (some conjecture but I would not be surprised) in areas where they think the 10th percentile claims will get them a good reduction. But people will not have the resource to put up too much of a fight. It really then does come down to in some cases bullying and I have certainly seen them try that as well as making legislatively inaccurate statements which, if done to the same degree of applying for costs above the borders as HMRC have tried to decrease the claim below the borders. I would be consider fraud. HMRC do have (2006 precedent) a duty of care to not incorrectly apply tax law. Thus they should not misrepresent by either act or omission. They are (whether through ignorance, bad training or both) doing this by both act and omission.

I would ask also can the comedy duo of Should Really Know something and Hugo amount of nothing please go and do their double act elsewhere. This is actually important to UK Industry and frankly, you two are not.

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Replying to RandDTaxUK:
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By Hugo Fair
13th Jul 2023 18:35

I was going to let your previous (both unwarranted and wholly over the top) attack on me slip away like the drizzle off a duck's back that was its sole value ... but I see you're determined to make it personal.

Have you considered donating even a tiny portion of your ego to those who are less well endowed in that area ... such as Boris Johnson?

I can't be the first person to have pointed out to you that your tone and random, unsubstantiated accusations are neither indicative of you having a true sense of self-worth, nor of any ability to communicate in a convincing manner to those whom you deem hostile (despite them never having heard of you or having any desire to meet you).
Maybe that's why HMRC appear not to have listened to you (which is a shame if you truly have words of wisdom to impart, rather than just rants).

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Replying to Hugo Fair:
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By RandDTaxUK
13th Jul 2023 23:08

I commented on your not untypical speaking nonsense.

As you would know, if you had a clue what you are talking about QC's / KC's, HMRC, HM Treasury, MPs, Secretary's of state and Chancellor's have utilised my input in this regime for over 20 years. The comment I made explained why some of the issues exist.

The inexperienced and speculative nonsense you spouted added nothing useful.

So regarding EGO. I have reached the highest levels internationally in two primary fields of expertise and when needed also dropped work for three months to prove a medical route was necessary to save someone's life.

An EGO issue is when there is a gap in the reality between what one considers are one's abilities and what one can actually do.

Apart from the one point above that is only mentioned because it might make you realise that the reason I can do R&D Tax to this level is I can understand in less than three months a neurological issue that is post doctoral research and the Professor of Neurology at the hospital stated was terminal even when given my first weeks research that already showed a hypothesis for cure.

But other than this point the only topic I make comments upon are R&D Tax.

In that area there is no GAP between what I say I know and what I can and have demonstrated over £7 billion of claims. Which is why I do explain the issues that I have the qualifications, experience and capability to back up.

The REAL EGO issue is yours because you mouth off about almost everything and a lot of what I have seen is, as it was today ill informed drivel. So it is YOU that almost daily demonstrate the gap between what you think you are capable of pontificating about and what you actually know. Or do you truly believe you are expert in ALL the areas you THINK people want to hear your opinion about?

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Replying to RandDTaxUK:
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By Hugo Fair
13th Jul 2023 23:44

Q.E.D.

BTW you've very clearly demonstrated the most fundamental difference between us ... in that I truly don't care what your (or indeed anyone else's) opinion is of me, whereas you seem to feel that others' opinions of your 'worth' are all that matter (to you at least).

Shame because any potentially valid thoughts you may have will never escape the vacuum with which you choose to surround yourself - that, as I said, may explain the lack of acceptance about which you keep complaining.

Anyway, you obviously aren't interested in my opinions (or indeed any that don't endorse your viewpoint) ... so this verbal volleying is absolutely pointless and I will leave you to post whatever you will - without further reaction.

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Replying to Hugo Fair:
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By RandDTaxUK
14th Jul 2023 08:09

Do you actually know what QED means?

Just saying you have proven something without any reasoning shows where the actual vacuum is Hugo. It is very clear that you don't care what people think about your opinion otherwise the volume of valid and worthwhile comments divided by the total comments would be a higher ratio.

But the point I actually made was that mine is based on FACTS and 20 years of primary experience backed up by another 20 years of supporting experience in product development and launch.

Whereas yours was unbacked up opinion based on the little bit of alleged knowledge you have on this, as well as so many other topics. I don't care what your opinions are for the very reason that they are unsubstantiated rhetoric.

What I asked was that (unless you or the other chuckle brother had anything actually fact based to add) that you went off an talked about another subject you know nothing about and stop providing support for statistically invalid opinions regarding R&D Tax.

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Replying to Hugo Fair:
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By Open all hours
14th Jul 2023 15:10

It is just a shame that so many on the R&D bus have taken so many clients and indeed HMRC for a ride.
Perhaps this is why the more respectable side get somewhat upset. Their ire should be directed at those who have caused the reputational damage and not at those of us who have to clean the mess up later.

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