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Rise in bogus R&D claims prompt clampdown from HMRC
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Rise in bogus R&D claims prompts HMRC clampdown

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HMRC responded to concerns about the rising tide of error and abuse within its £9.5bn R&D tax relief schemes with new controls and conditions set out in draft Finance Bill clauses.

22nd Jul 2022
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The scale of the problem HMRC is facing with fraud and error in the research and development (R&D) tax credits system was laid bare in the auditor’s report on HMRC’s 2021–22 HMRC annual accounts.

According to the National Audit Office (NAO), HMRC estimated the level of error and fraud relating to R&D tax reliefs at £469m for the year, up from £336m in 2020–21.

Spending on the SME side of the R&D incentive scheme totalled £5.9bn for the year and also accounted for the lion’s share of the outgoings, which were up £510m on the previous year. 

Research and development expenditure credits (RDEC) for larger organisations cost £3.62bn, down from £3.84bn in 2020–21.

Fraudulent claims on the rise

The estimated overall percentage fraud and error rate was 4.9% in 2021–22 compared to 3.6% in 2020–21. HMRC’s Fraud Investigation Service (FIS) reported that the value of cases confirmed as fraudulent rose from £11.2m in 2020–21 to £26.9m in 2021–22.

Although the government auditors flagged up material uncertainties around HMRC’s estimates, a review of a sample of compliance investigations confirmed “an increase in the proportion of claims that appeared to be speculative, and which were completely disallowed because the activities did not qualify as research and development”.

The cumulative evidence indicated the level of error and fraud was material to that expenditure stream, the NAO concluded.

Against this backdrop of uncontrolled rises in expenditure and irregular claims, HMRC paused all R&D claim payments in April 2022 to give the department time to work out how to curb potential abuses.

Officials told the July meeting of the research and development communication forum (RDCF) that they were “committed to tackling error and fraud within the reliefs”, promising significant steps including more resources and tougher risk assessments.

New Finance Bill clauses

The meeting also heard an outline of measures included in the draft Finance Act requiring R&D relief claims to be made digitally, accompanied by detailed descriptions and costs for R&D activities across qualifying categories. The claims will also have to be endorsed by a named senior officer of the company.

Any company seeking to make a claim will have to inform HMRC in advance, within six months of the end of the period to which the claim relates. Claims will also need to include details of any agent who has advised the company on compiling the claim.

HMRC told the NAO it had already established a threat risk assessment process for all R&D relief claims and implemented new payment verification controls. The department is also accelerating the creation of a new Research and Development Anti Abuse Unit, originally announced in the autumn budget.

Them and us

In a recent post that pre-dated the NAO analysis and draft legislation, R&D tax specialist WhisperClaims asked, What on earth is going on with R&D tax relief?

The article highlighted a growing “them and us” atmosphere between HMRC and specialist advisers at their recent meeting and reported on the growing frustrations with processing delays now that HMRC was starting to pay out claims again. The more hostile enquiry process, which now kicks off with letters from FIS and HMRC’s seemingly indiscriminate approach to enquiries “could be having quite the opposite effect of what they intended”, according to WhisperClaims.

“We’re seeing legitimate providers of R&D tax advice being, in essence, scared off from giving this advice and preparing claims, while cowboy providers refuse to support their clients through enquires and, in some cases, fold their companies to avoid HMRC scrutiny.”

With further legislative changes on the horizon, depending on who is in residence at Number 11 Downing Street this autumn, the “slight turmoil within R&D tax relief is likely to continue for some time yet”, the specialist advisers concluded.

Replies (14)

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By ireallyshouldknowthisbut
22nd Jul 2022 13:59

I do wonder if they should revisit what exactly the purposes R&D claims are.

Is it merely to get a once a year number in the Budget speech?
Or is to genuinely support industry doing something that would not otherwise do?

If the latter would it not be better to do down the targeted grant route, and have R&D credits as part of an initial project plan to help fund it, not as it is now an afterthought tacked onto a tax return as a "nice to have". Whilst you would still get fraud it cuts out most of the ambulance chasing stuff and the projects which would have happened anyway. The point is not supposed to be to enrich claim firms and accountants charging a 25% cut for the claim.

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Replying to ireallyshouldknowthisbut:
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By Hugo Fair
22nd Jul 2022 16:31

100% agree.

Of course the trouble with "the targeted grant route" is that by definition it requires govt to set those targets AND then to leave them alone for a little longer than the time it currently takes them to change their mind after reading criticism in the Press!

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By Hugo Fair
22nd Jul 2022 16:26

Of course the 'elephant in the room' is whether R&D tax relief is really a priority in an economy that has got to cope somehow with the post-Brexit and pandemic fallouts, alongside the burgeoning rates of runaway energy costs and any policies relating to a green economy (whilst Putin glowers on the horizon)?
And that's before you get to levelling-up, or food production, or international trade and more.

Otherwise this is just more hot air.

"measures included in the draft Finance Act requiring R&D relief claims to be made digitally, accompanied by detailed descriptions and costs for R&D activities across qualifying categories. The claims will also have to be endorsed by a named senior officer of the company"
With the exception of their favourite buzzword (digitally), any R&D claim with which I've ever been involved has already done all of that (alongside a lot more detail).

"Any company seeking to make a claim will have to inform HMRC in advance, within six months of the end of the period to which the claim relates"
The inferred mandation might be new, but is only what I've always done (not by informing them 'in advance' but by getting the claim in within those timescales) ... one more administrative hoop is not that hard (but nor will it be at all useful except in consuming HMRC resources)!

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Replying to Hugo Fair:
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By Dib
26th Jul 2022 13:15

The inform HMRC in advance business applies only to new claimants...

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By Paul Crowley
22nd Jul 2022 19:31

I think there is more R & D taking place in figuring how to pretend that normal expenditure is R & D than ever before.
So clearly a success for for all concerned

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By Beef curtains
23rd Jul 2022 16:37

I have ditched two significant customers because I refused, in both cases, to endorse claims under the Small Companies regime when, in both cases, the research had been either supported by Notified State Aid or was work undertaken on behalf of a client of the company concerned. One of the local ICAEW firms submitted them, and amended claims also, without undertaking any due diligence whatsoever and solely on the say so of the managing director concerned.

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Replying to Beef curtains:
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By petestar1969
01st Aug 2022 10:24

Hmm, you've highlighted a fundamental flaw in "self-assessment".

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Donald MacKenzie
By Donald MacKenzie
25th Jul 2022 10:25

My impression is that fraudulent claims will be far higher than the few tens of millions in the article. I have had clients in construction doing ZERO actual research and development who have been called by "specialists" offering to get them some "free money". Keeping up to date in methods is NOT R&D.
There seems to have been a dearth of checking by HMRC so cowboys have come it the market.

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By Runagood Team
25th Jul 2022 10:56

I've been waiting for 6 months to have my (legitimate) claim paid and my accountant can get no ide when / if it will be paid...not good enough!

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By Justin Bryant
25th Jul 2022 11:02

This farcical relief should be scrapped for the reasons stated above. It's yet another example of how totally dumb the Government & Treasury are.

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By djn
25th Jul 2022 11:22

I think the fraud % will be far higher than this. A bricklaying contractor of mine has had 10k's of repayments from this scheme as an advisor has assured them it's legit. I had passed him to a reputable firm previously who agreed with me that there was no claim.

The amount of money these firms must have made by making up projects and plucking figures out of the air is very frustrating. These firms would make more money from a client than we would in years.

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Replying to djn:
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By Justin Bryant
25th Jul 2022 12:26

Yes; compare & contrast how HMRC reacted to lawful EBT loan planning in the low £bns in total compared to this blatant and rampant outright tax fraud, probably at least in the low £bns annually and high £bns in total that's been going on for many years as stated numerous times by many here.

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By indomitable
25th Jul 2022 15:59

About time - too many cowboys in the industry with a so called 100% claim rate (which is a complete nonsense of course)

HMRC should be scrutinising. We are finding it is taking our clients longer to get a credit approved, but IMO a small price to pay if we can chase the cowboys out of the market

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By moneymanager
26th Jul 2022 09:19

"Rise in bogus R&D claims"

PWC calls the related department "Innovation Incentives" and they are the sterotypical "Mr 10%s" too, as I have been told "We have very good lawyers" and quite possibly who have a hand somewhere desigining in complexity when they advise government and more when they advise, or do they hard sell to, potential claimants that they can make the pips squeak.

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