“Aggressive” R&D Tax Credit advisors to be disrupted by HMRC

One of the UK's biggest R&D Tax Credit advisory firms proclaimed this week that the "best thing" about R&D Tax Credits is that "you can claim back on R&D carried out two years ago".

Not according to HMRC.?Astonishingly HMRC on Wednesday suggested that such advisers were now operating on the margins of the scheme with a business model that needs disrupting.

HMRC confirmed to a forum of R&D advisors that it will go ahead with the requirement for new R&D claimants to pre-notify HMRC of their intention to submit an R&D Tax Credit claim within 6 months of the end of a financial period.

This change will come into effect from 1 April 2023 and will effectively mean that new R&D Tax Credit claimants will see the current 2-year window to file an R&D claim reduced to 6 months.

HMRC confirmed the rationale behind the introduction of pre-notification is not only to tackle fraud but also “boundary-pushing” claims and “simply mistaken” claims.?

HMRC expects to see benefits in two areas:

1.???Enable the advance vetting of R&D claims

HMRC said that pre-notification will provide it with some information about forthcoming claims which they can use to direct compliance activity. This may be as simple as sending out a letter to the named individual from the company to ask if they are sure whether the R&D qualifies or not.?

First-time claimants operating in sectors which HMRC wouldn't normally associate with R&D will be encouraged to go back and read the guidance.?

Whilst pre-notification “will not itself be a copy of the claim”, it will “include some information about the claim”.?This appears to head-off the suggestion that accountants will automatically tick an R&D claim notification box for every tax return filed, on the off chance that their clients may decide to file an R&D Tax Credit claim at a later stage.

2.???Target R&D advisors operating “at the margins”

Fascinatingly, HMRC sees pre-notification as giving them the ability to:

“Limit the ability of [agents] on the margins of the whole business of encouraging companies to go back to put in claims for a couple of past years.?It will effectively limit the ability to [go back two years] and thereby disrupt that channel”.

HMRC acknowledged that the change will create lot of additional burdens for everyone involved but that it sees significant advantages.

Now, it is perfectly legitimate for R&D claimants to be able to go back and file a claim for the last two financial years but clearly HMRC believes that the system is being abused by certain R&D advisors operating “on the margins”.

What does HMRC mean by advisors “on the margins” that operate in a way that requires “disrupting” when it is entirely within the legislation for companies to claim for up to two historical claim periods?

Victoria Atkins MP, the Financial Secretary to the Treasury, gave some hints recently when she told the House of Lords Finance Sub-Committee that, whilst R&D Tax Credits undoubtedly contribute to growth, the SME scheme only stimulates between ￡0.60 and ￡1.28 of additional R&D for every ￡ put in.

I strongly suspect that the Treasury views the ability to claim Tax Credits for R&D undertaken two years ago as a “deadweight” that adds zero value to the economy.

The problem is compounded by R&D advisors who “aggressively market” this opportunity, often charging contingency fees of 25% or even 30% for historical claim years.?Unsuspecting companies who are targeted by advisors and encouraged to make R&D claims may be perfectly happy to pay an advisor to access “free money” that they weren’t expecting.

Many R&D advisors milked this for all it was worth and proudly published case studies boasting of clients that never knew they were undertaking R&D until a cold-calling R&D Tax Credit salesman told them they were.?

It is clear that HMRC views these particular advisors as problematic.?Nevertheless, whilst making R&D claims up to two historical years was always a gigantic money-spinner for R&D advisors, doing so was always firmly within the rules.

It appears that the Treasury and HMRC have finally woken up to the situation and that these new measures will essentially close-off this perceived loophole which allowed a growing number of R&D advisors to exploit a legitimate tax rule.?

In hindsight, the model was always going to be unsustainable as the Treasury rewarding companies financially for R&D they have already done is the very definition of a deadweight.

This is why I fully agree with the pre-notification of R&D claims.?In theory, it should allow the scheme to be re-focussed on incentivising future R&D that might not take place without the ability to access R&D Tax Credits.

Unfortunately, the Treasury has seen fit to simultaneously slash the R&D Tax Credit benefit available to SMEs for R&D that hasn’t yet taken place.?

Reducing the R&D Tax Credit rate to make the scheme less attractive for fraudsters is essentially a capitulation by the Treasury and an admission that HMRC has failed to get a grip on the huge amount of fraud and error that has plagued the R&D scheme in recent years.

I will be writing about some of these issues in future articles but meanwhile I’m delighted to announce that Paul Rosser has written a guest article for the next newsletter which highlights the pitfalls of re-filing previously submitted R&D claims with additional R&D expenditure.

This is a practice adopted by a number R&D advisers whereby a cold-calling salesperson contacts a company that is already claiming R&D Tax Credits and tries to convince them that, by using their particular firm, they can double, triple, or even quadruple their historical claims.

I don't imagine it will be too long before HMRC has this type of advisor in its sights.

Rufus Meakin is a specialist in helping companies prepare complex R&D Tax Credit claims where robust HMRC compliance is essential.

If you would like to discuss any aspect of your R&D Tax Credit claim then please feel free to call me on 0794 110 3285.