R&D tax relief has been available on qualifying expenditure for over 20 years. From modest beginnings, companies now get annual deductions totalling around £9.5bn. However, HMRC estimates some £0.5bn of that is wrongly claimed every year through error or fraud. In some cases, this has involved bad actors in the advisory sphere contacting businesses which had never previously considered they undertook R&D offering to help them claim tax credits in return for a percentage of the “savings” and proposing more aggressive claims.
HMRC are now on the alert for dubious claims. HMRC challenges to R&D claims have risen ninefold since 2019. In particular, HMRC are starting to systematically target the current and former clients of R&D boutiques who went too far.
Where that leaves old claims HMRC didn’t previously review in detail
HMRC have civil powers to go back many years to recover historic tax repayments and savings from excess claims. If businesses and / or their advisors acted carelessly or deliberately that can mean up to 6 years or 20 years respectively. Any recoverable tax is also subject to late payment interest – with HMRC charging 7% as at 31 May 2023 and likely increases on the way.
Depending on the behaviours involved and the degree of mitigation, civil penalties range between 0% and 100% of the additional tax or over claimed repayments.
In the most egregious cases HMRC might also consider criminal prosecution.
Where that leaves new R&D claims going forward
HMRC is now reviewing new claims much more carefully and taking a firm approach to any it suspects are fraudulent. HMRC has set up a specialist team in its Fraud Investigation Service to challenge and block such claims. That could result in hefty tax geared penalties based on the tax that HMRC would have been lost had such a blocked claim been allowed or, again, criminal prosecution in the most egregious cases.
Businesses should not be deterred from making legitimate R&D claims. However, they should not make them speculatively or without seeking the advice of reputable tax advisors. From 1 August 2023, new tighter rules include the need to:
- Identify any advisor who has assisted with the claim;
- Identify the responsible internal person within the company itself;
- Provide a wealth of detailed supporting information;
- To spell out, in HMRC’s words:
- What is the main field of science or technology.
- What was the baseline level of science or technology that the company planned to advance.
- What advance in that scientific or technological knowledge did the company aim to achieve.
- The scientific or technological uncertainties that the company faced.
- How did your project seek to overcome these uncertainties.
How we can help
Our tax specialists are experts in making R&D claims. They are equally well placed to review past R&D claims made on the advice of other advisors which could now be causing sleepless nights.
In the event that we conclude past claims might have been unjustified, our Tax Disputes team can expertly approach HMRC to confirm the position for all years such claims were made. In doing so, they will head-off the risk of HMRC opening an intrusive and punitive investigation and mitigate the position to minimise any tax payable and the penalties and late payment interest thereon.
This post was written by Andrew Park, a Tax Partner at Price Bailey. Andrew specialises in tax investigations and has particular expertise in providing solutions to tax problems and resolving investigations and voluntary disclosures with HMRC. If you have any questions on the above or related to making an R&D claim, you can contact Andrew or Gemma Thake using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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