We have been saying for a while that exciting things are happening within the R&D tax relief space but, unless you are actually working within this space, there has not been a lot of evidence of this.

That is until the last few days where the Times has published a number of articles about HMRC’s activity in identifying and stopping millions of pounds worth of fraudulent activity.

For those with a Times account, the full articles can be found via the following links but for those without, I will provide a brief summary and our thoughts:

‘Free money from HMRC’: firms cash in on questionable tax credits
An article highlighting the misuse of the schemes (estimated to be costing HMRC £hundreds of millions) and naming a number of companies which seem to be doing a less than stellar job in advising others what qualifies for R&D tax relief such as:

• A Youtube video published by financial consultancy Sedulo in which a managing partner states that bars and restaurants are ‘categorically’ eligible for the schemes and that “R&D grants are available in the leisure industry and that’s a fact because we’ve got them”.
• A case study from accountancy firm Radish who helped a pub claim a little over £28,000 based on R&D claims relating to changes in their pub’s menu.

Our thoughts: Whilst we cannot comment on the eligibility of any R&D claims prepared by Sedulo, their statements are worrying for two reasons. One is that no type of company is categorically eligible for R&D tax relief. Each company must be considered individually based on its activities and whether these meet the criteria for R&D tax relief. Secondly, a company benefiting from R&D tax relief is not evidence that their R&D claim was legitimate. HMRC historically have checked very few R&D claims and hundreds of ineligible claims are thought to have gone unnoticed.

We took a look at the case study from Radish’s website where a quote from the pub’s owner is shown as:

“I actually didn’t think we’d have a claim, I still can’t believe it – we’re only a small restaurant & hotel! But having spoken to Tim, it’s down to all the hard work that goes into crafting our menus to cater for vegetarians, vegans and those with a gluten-free diet. It’s very difficult to get a menu that suits all tastes and needs, and we can’t have half a dozen different menus as it doesn’t’ make economic sense. Looking at a menu you don’t see the work that has gone into it, but we do it because we want to please everyone who walks through the door – that is R&D for The Coach House Inn.”

Again, we can’t comment on the specifics of what was actually submitted but for a project to qualify for R&D tax relief, it must be seeking to advance a field of science or technology. Whilst creating a simple menu that caters for numerous dietary requirements may be complicated, it can’t be said to create an advance in a field of science or technology.

Eight held over research & development tax credit ‘fraud conspiracy’
Notification that 8 individuals including one tax agent have been arrested over alleged organised criminal attacks where the individuals have “arranged more than 100 sham claims worth more than £16 million”.

Our thoughts: There is little detail on what’s actually happened, and we are eager to hear more. We’ve known for some time that HMRC are putting significant effort in attempts to combat the rise in submission of illegitimate R&D claims. The wording in this article seems to suggest that these arrests were not related to companies unknowingly submitting ineligible claims based on poor information from their R&D advisor (which in itself is a huge problem) but that the individuals had identified and were using ways to abuse the systems.

Huge cost to taxpayers of HMRC research & development initiative comes out in the wash
Similar to the other two articles in that it highlights the suspected abuse of the R&D tax credit schemes, the potentially spurious claims which are being submitted, the organised criminal attacks, the arrests already mentioned in the previous article, and HMRC’s efforts to tackle this abuse but also notes some of the proposed changes in legislation that should be coming into effect next year.

Our thoughts: HMRC are quoted as saying that since April this year more than 1,600 claimants have been asked for more information in support of their R&D claims and that 80% of these claims have not been paid out. It’s great that over 1,000 unsubstantiated claims have not been paid out but it would be even better if any action taken against these claimants and/or their R&D advisors could be highlighted.

We regularly advise of the potential penalties for submitting ineligible R&D claims but this advice can fall on deaf ears as there doesn’t seem to be a lot of evidence that these potential penalties ever become a reality.

In conclusion and in line with our own thinking, the threats to R&D tax credits seem to come from two avenues. One is organised crime and blatantly fraudulent attacks on the schemes whereas the other comes from companies which genuinely feel that their claims are legitimate.

We offer a free of charge service where will review a company’s R&D claim and find that about 20% of these are legitimate claims (with about half of those actually underclaiming), but 80% are either overclaiming or do not have a legitimate claim at all.

The majority of these will have been poorly advised by either an advisor (accountant or other) that mistakenly thinks they understand the schemes and are offering good advice, or an advisor that knows their advice is poor but also knows that HMRC are unlikely to check the claims and that any penalties issued would likely be to the claiming company and not themselves so they feel they cannot lose.

Unfortunately, this type of advisor is thinking about their own bank balance and not what is best for their client, the R&D tax relief schemes and the UK economy.

If you have any questions on this blog or anything R&D related, please contact us at [email protected].

Posted: 01 Nov 2022