Explaining the changes to the research and development tax credit – tackling fraudulent activity and abuse

During the Autumn Budget 2021, the Government highlighted its deep concern about abuse and border pushing involving Research and Development Tax Credit Relief. Evidence shows that this abuse has increased in recent years. It is estimated that errors and fraud in both the SME and RDEC schemes equate to 3.6% of total relief expenditure, or £311m.

Matthew Jones, Managing Director, LimestoneGrey, commented:

Concerns about abuse and fraud in the R&D tax credit sector are addressed by qualified professionals. Unfortunately, a minority tarnishes the reputation of the relief and as a result there is a risk that good advisers and companies that comply with the rules and regulations will be penalized. The fact that the government is introducing measures to deal with this problem can only be a positive action, but it will be interesting to see if these measures will go far enough to prevent this fraudulent activity while not harming the genuine claimants who apply rules correctly.

What are the issues facing the R&D tax credit industry?

There are two key areas the government is focusing on when it comes to misuse of aid:

1. R&D tax credit relief is claimed by companies in their CT (corporation tax) return. However, the current process carries various risks of abuse. For example, cash benefits payable are available to loss-making companies that have never paid corporation tax, making this attractive for possible abuse by rogue companies.
2. Unregulated R&D consultancies and consultants who are not members of any professional industry bodies have emerged. As these advisers do not have the necessary qualifications to back up their pitches, a pattern has emerged where they use clever marketing and business development techniques to reach out to SMEs and sell them the dream of claiming back significant sums of money through tax relief. research and development credit. Unfortunately, these activities can be performed by anyone, many with no tax experience and potentially impressive sales experience. For SMEs who are new to the system and unfamiliar with the process, these tactics are incredibly powerful.

What are the proposed measures to address R&D tax credit abuse?

Measures are already in place to combat the emergence of fraudulent activities in the industry:

• HMRC has already allocated additional tax relief compliance resources to research and development to understand the nature and scale of the fraud taking place. However, the current increase will not be enough to deal with the problem. With the number of claims rising from 35,565 in 2014-15 to 85,900 in 2019-20, more resources are still needed. HMRC recognizes this and plans to further increase the workforce with the introduction of a new cross-departmental team focused on abuse.
• The introduction of the PAYE cap, launched in April 2021, aims to limit the number of fraudsters trying to take advantage of a cash boost in the form of paying tax credit due.

Now the government has gone further by introducing additional measures. When the changes take effect, the following points will need to be met by advisors and companies:

• all R&D tax credit claims will need to be made digitally (except for those companies exempt from the requirement to provide a company tax return online)
• digital claims in the future will require more technical details
• any claim will need to be approved by a designated senior officer of the company
• companies will need to inform HMRC in advance that they plan to make a claim
• claims will need to include details of any agent who advised the company in preparing the claim

Matthew Jones also commented:

The measures listed above reinforce the fact that businesses must have full confidence and trust in their chosen advisor. These measures force companies and consultants to be more transparent by:

• creating a digital footprint
• providing additional content in the submission
• appointment of responsible officers both on the part of the adviser and on the part of the company

It is hoped that these measures will discourage unscrupulous agents and companies from exploiting the system as there will be nowhere for them to hide when submissions are scrutinized by HMRC.

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What are the next steps?

While the Government will introduce the plans to prevent this abuse, it is interested in further views from stakeholders.

The draft legislation will be published later in the summer, with the final legislation included in the Finance Bill 2022-2023. The changes will come into effect from April 2023.