Catax Solutions look at how HMRC plans to stop abuse of R&D tax reliefs

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HMRC has been growing increasingly concerned about abuse of the R&D tax relief scheme and announced plans last year to clamp down on rogue claims.

Catax Solutions Limited look at what businesses need to be aware of…

HMRC’s unease stretches back years. It estimates that £311m has been lost due to fraud and error in the last two years.

The department has been quick to respond, hiring 100 new caseworkers to boost the amount of proactive compliance work it is able to do. They are partly responsible for an increase in tax enquiries focused on R&D tax reliefs.

The extra personnel turned the heat up on those who had made false claims or been badly advised. This led to a lot of scaremongering in some quarters, prompting a number of businesses to wrongly abandon legitimate claims, even with credible accountants and specialist firms.

This is how abuse of the scheme has undermined confidence in the R&D tax relief scheme as a valuable benefit, and the good work of tax advisers of all kinds.

HMRC’s clampdown can, therefore, only be a good thing, and the department has now revealed exactly how it plans to do this in its Tax Administration and Maintenance Day report.

Its changes represent a minor revolution in working practices which have been in place ever since the scheme came into being in 2000.

These are the steps HMRC will take, from April 2023, to increase compliance:

  1. All claims will have to be made digitally. This is going to make the process more efficient but, importantly, it is also going to make it easier for HMRC to share information internally, unlock faster statistical analysis of claims and enable inspectors to spot anomalies. HMRC already inspects a certain proportion of claims each year where there’s no expectation that abuse will be found. We expect HMRC to survey an increasingly wider range of claims as time goes on.
  1. All claims will have to include details of qualifying activities and costs. R&D tax relief claims are not automatically checked in detail by HMRC and, historically, claim reports have not had to contain exhaustive detail. This has encouraged some claimants to become too vague in their claims, which means they don’t pass even a cursory inspection. From now on, claims will have to be capable of satisfying tax inspectors that the expenditure being included is eligible.
  1. All claims will have to be signed off by a senior named officer at the claimant company. The aim of this measure is to increase compliance by making a named person responsible. If the claim is not compliant, that individual will have to answer for it and this will then bring the finer details of R&D tax relief claims firmly within their professional duties to the company.
  1. All claims will have to include the details of the agent submitting the claim. This is an extension of HMRC’s desire to see personal accountability embedded in claims, much like the provision above regarding named officers. It’s not just accountants who can sometimes get claims wrong, though in their case it’s usually by mistake. So-called specialist R&D tax advisers have also sprung up and been caught applying the legislation incorrectly. Both these measures are bold but important steps towards accountability in this area of tax legislation.
  1. Companies may need to inform HMRC in advance that they plan to make a claim. It is envisaged that this will be done through a portal, and the company will be given a reference number to attach to the claim.

These proposals follow a consultation on the future of R&D tax relief published in March 2021 and it’s likely further changes will occur in due course. Companies and advisers have until 8 February 2022 to respond to these plans, alongside other changes disclosed in the report.

HMRC is clearly taking a far more strident approach to compliance — it will be allocating even more resources to tackle non-compliance and abuse — but this effort actually began in early 2021.

A rise in fraudulent claims was partly behind the reinstatement of the PAYE cap in April 2021.

Non-compliance appeared to have grown considerably after a previous version of the cap was scrapped in 2012. At the time, HMRC was responding to concerns it disproportionately hurt smaller, younger businesses. However, in subsequent years, HMRC investigators discovered numerous examples of claimants gaming the system and the department was forced to look at it again.

The PAYE cap limits payable credits based on the amount a company pays in tax and NIC deductions. The full impact of this will only become clear once claims for accounting periods ending on or after 31 March 2022 are prepared.

Its reintroduction was just the first salvo in a battle to roll back abuses which, due to the complex nature of qualifying activities, can sometimes be hard to spot.

The PAYE cap will undoubtedly play a role in ensuring compliance, but HMRC’s latest measures will complete the work of creating a hostile environment for abusive claims and fraudulent tax advisers.

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