HMRC clamps down on R&D Tax Credit "promoter-type activity"

It is now widely known that there has been a proliferation of questionable R&D Tax Credit claims filed with HMRC in recent years.

I have written extensively about the growth of the R&D advisory sector and how some firms actively target companies in sectors where R&D is highly unlikely to be taking place.?

Until the last year or so, selling into such sectors had been a lucrative business model as there was little competition from some of the more traditional R&D advisory firms. This meant that very high contingency fees could be charged, sometimes up to 35% of the total R&D claim value.

To be successful, these R&D firms had to rely on a lax oversight of the scheme by HMRC.

Covid was essentially a gift in this respect. With most HMRC staff working from home and many moved over to managing Covid-related support schemes, HMRC’s “pay now, check later” policy lulled many R&D advisors and claimants alike into falsely believing that all their claims were being “approved” by HMRC.

The general panic and uncertainty generated by Covid also meant that many businesses were seeking to insulate themselves from any financial risks. Cold-calling R&D salesmen and spammy social media messages found a receptive audience in 2020 and 2021.

Anecdotal tales began to emerge along the lines of “a guy down the pub said he’d claimed R&D Tax Credits for refurbishing his greenhouse and he reckons HMRC don’t check anything”.

Predictably, many local accountants decided to hop on the R&D bandwagon, resulting in thousands of error-riddled claims being filed with ever more implausible-sounding R&D.

The huge growth in the number of R&D claims, along with negative publicity in national newspapers such as The Times, belatedly forced the Treasury to take action.

HMRC targets “promoter-type activity”

In a recent call with the R&D Tax Credit advisory community, HMRC made it clear that it is now targeting what it describes as "promoter-type activity" by some R&D advisors.?

This is where HMRC has clear evidence of R&D firms encouraging companies to claim R&D Tax Credits when they are ineligible.?

HMRC recently wrote to over 80 R&D advisors requesting that they remove what it described as “misleading claims or advertisements”, such as claiming to have a “100% success rate” or stating that they are “recommended, approved or endorsed by HMRC”.

Intriguingly, HMRC indicated that it will also use other "tools available in the market" to combat this so-called promoter-type activity.

One such move is that HMRC has begun writing to companies in the nursing and care home sectors to advise that they will be highly unlikely to qualify for R&D Tax Credits.?These letters appear to be peremptory as they are being sent to care homes that have not even submitted an R&D claim.

In a letter sent to one care home, and seen by the R&D Tax Credit Insider, HMRC opens by saying:

“We are writing to you because you're a director of a company in either the nursing or care home sector. Companies in these sectors are being targeted by agents or third parties, who encourage them to make Research and Development (R&D) tax relief claims.

These claims are often ineligible so we're asking company directors to review all R&D claims submitted on behalf of their company to make sure they’re correct”

After making the usual suggestions about “What to do if an agent contacts you” (such as “asking yourself… does any of the information you’ve received about R&D sound too good to be true?”), HMRC states that:

“It is not impossible for nursing and care homes to meet the R&D criteria, but we think it's unlikely. This is because we've seen very little evidence of businesses in these sectors doing any qualifying activity. We reject most R&D claims in these sectors as they are usually based on normal day-to-day business activities such as:

• individual patient meals or care plans
• observing behaviour
• digitising admin
• constructing sensory gardens”

?The HMRC letter goes on to say that:

“Nursing and care homes have received unsolicited phone calls from agents, advising that their general business activities qualify for R&D relief. Many have told us that after the first phone call, they only sent the agents copies of their accounts and PAYE records.

These [R&D] claims are not for activities that try to achieve scientific or technological advances in the field. Companies often can't provide evidence to support them".

Under the heading “how R&D agents work”, HMRC explains that:

“Some specialist R&D agents advise companies on a ‘no win, no fee’ basis which suggests that there's little or no risk to you. But this is not the case.

These agents usually insist that they receive any repayment due for an R&D claim. They then deduct a fee, usually 15% to 20%, before paying you the balance.

But just because we've paid a claim, it doesn't mean we've approved it. Our approach is to pay a claim first and check it afterwards. And because we're concerned about the number of incorrect claims we've had from nursing and care homes, we're checking many more of these claims than usual.

If a company claims R&D incorrectly, it must pay back the full amount claimed, including any agent fees. We can also charge interest and penalties.

It's also important to be aware that we never recommend or endorse specific accountants, agents, or advisors”

A welcome step

As the Chartered Institute of Taxation recently pointed out in a letter to the Treasury , HMRC’s recently enhanced R&D Tax Credit compliance approach has been ham-fisted and often inept.

Whilst it may well be a case of locking the stable door after the horse has bolted, this campaign by HMRC to warn companies in sectors where R&D is unlikely to be taking place and that they may be targeted by unscrupulous R&D Tax Credit agents and claim farms is to be welcomed.

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.

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