HMRC gives update on R&D Tax Credit “fraud and error” at RDCF
Article written by Thomas Watson , Lloyd Coulson CTA and Suzanne Clements of MSC R&D
The HMRC-sponsored Research & Development Communications Forum (RDCF) is an opportunity for HMRC to meet with the R&D Tax Credit advisory community twice a year to discuss the operational and policy aspects of the R&D schemes.
The RDCF meeting on 26 July covered R&D Tax Credit policy and operational updates as well as details on how HMRC is attempting to combat fraud and error.
Experts from MSC R&D take a detailed look at what HMRC had to say.
R&D Tax Credit Policy Updates
The session began with an update on current and future planned policy changes to the R&D Tax Credits regime.
Several previously announced measures have been drafted into Legislation, intended to feed into the Finance Bill scheduled for Autumn 2023 later this year.
The reforms include:
More significantly, further details were discussed regarding the proposed “merged simplified R&D scheme”.
The draft legislation for the merged R&D scheme has now been published here, with consultation running from now until September. Amendments will then be sought from parliamentary council before a decision is made at the next fiscal event (likely to be the Autumn Budget) on whether to merge the two schemes. The proposed new scheme would then be in place from April 2024.
Although Dave Harris from HMRC suggested there was still no firm decision on whether the merged scheme will go ahead, given the significant effort which has been put into the proposal, together with further details provided on the call, it certainly seems likely these reforms will be introduced.
Some further details were provided on the call to provide clarification and explain decisions on areas of potential uncertainty under a merged scheme:
Further policy details were also provided on the new R&D Intensive Scheme, in place from April 2023. The intention is this scheme would operate alongside the potential merged scheme, should it come into force, still essentially resulting in two separate schemes operating simultaneously. No further amendments to this scheme are currently under consideration, although the scheme will be under continued review as to its effectiveness.
The HMRC policy team estimates that the support through the R&D Intensive Scheme will be worth ￡500m per annum, and it is expected there will be around 20,000 mainly early stage SME claimants by 2027-28. ?
With the further new rules around pre-notification of making a claim, this could provide a barrier for companies potentially accessing this relief if they are potentially unaware of the existence of the scheme in earlier accounting periods.
The scheduled Autumn Statement will therefore prove a significant date for companies claiming R&D tax relief, as the decision on the proposed measures will be determined.
R&D Tax Credit Operational Update
In the operational section, John Beazley the HMRC business tax and operations lead, shared some noteworthy statistics and improvements in R&D Tax Credit claims processing from the 2023 tax year.
During the 2022-23 period, HMRC successfully processed 43,577 R&D claims from SMEs and 9,659 claims under the RDEC scheme, a 1% increase from the 2021-2022 period.
Notably, HMRC demonstrated a remarkable recovery in processing R&D compared to previous years in peak months, processing 92% of R&D claims within 40 days in December and January and maintaining the same efficiency during the busy period of March and April with 91% of claims processed within 40 days.
However, a processed claim does not mean the claim will not be later opened up for enquiry.
To give R&D claimants certainty to reinvest the R&D relief received, this uncertainty should be addressed as a priority.
Going forward, due to the enhanced checking processes now in-place, HMRC has revised its aim to pay 85% of tax credit claims within 40 days.
However, in a welcome development, the long wait on HMRC's phone line may soon become a thing of the past. The organisation revealed its ambition to feature a dedicated R&D claim performance section within the agent services dashboard, providing real-time information on the progress of R&D claims.
The Q&A section shed light on pertinent enquiries, related to the imminent use of the Additional Information Form (AIF):
R&D Tax Credit "fraud and error"
James Armitage, Deputy Director of Incentives and Reliefs, had some interesting comments relating to the current compliance response to perceptions of fraud and error within the R&D regime.
He stated that given the levels of error and fraud in R&D, HMRC wanted to get a genuine picture of what was happening.
Their methodology was to take 500 cases randomly selected using no risk criteria at all, and a specialist R&D team worked those cases in an enquiry process.
This work led to the figures within HMRC’s Annual Report and Accounts published on 17 July 2023, showing non-compliance in R&D reliefs is significantly higher than previously estimated, rising from an estimated 3.6% to 16.7% (￡1.13bn). This is highest in the SME scheme, where non-compliance is estimated at 24.4% (￡1.04bn).
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However, the accompanying slide displayed as he spoke stated that this is based on a “different methodology so it does not mean the figure has risen”, but is a “new more accurate methodology used by HMRC for measuring non-compliance”. ??
He said that the work related to claims for 2021, and therefore was not related to new bulk compliance activity.?
HMRC has been questioned on these numbers, and Mr Armitage stated that of the ‘error’ cases – as distinct from ‘fraud’ cases - only 1 claimant withdrew on the opening of the enquiry, and 11 claimants in total withdrew due to the cost of the enquiry process. He claimed that the main reason people withdrew from the enquiry – or conceded - was that they accepted they either hadn’t been doing R&D or hadn’t understood the rules of the regime.
Mr Armitage stated that fraud was not a key driver behind non-compliance. He said that HMRC has a high benchmark for fraud as they need to prove it, and in many cases the available information was not sufficient to do this. He claimed HMRC identified a “strong indicator’” of fraud in cases representing under 5% of the total value of claims investigated, although he believed the “true figure” of fraud may be higher.?
He claimed the “main driver” of non-compliance related to interpretation of the advance in science or technology. This is rather concerning, given the evidence we have seen of HMRC caseworkers failing to understand the rules they have been tasked to administer, and in particular misinterpreting the BEIS Guidelines which have statutory force.
If HMRC is arguing that the main reason 125 out of 500 randomly selected cases - ie cases not picked up because they exhibited particular risks - were rejected was because HMRC believed the claimant had incorrectly interpreted the rules surrounding what constitutes an advance, then I would very much like to see some of those cases.?
Mr Armitage argued that lower value claims exhibited higher levels of error or fraud (between 60% and 70%), but that the total value of the error or fraud discovered came mainly from higher-value claims. Therefore action taken to combat issues in low-value claims could mitigate the problem but would not solve it.?
I’m worried about putting ideas into their heads, but I do hope that this does not mean that the Midsize stream will now subject claimants to the same ‘bulk compliance’ activity seen in ISBC (the Individuals and Small Business Compliance Directorate).
The view was that first-time claimants exhibit higher levels of error or fraud, and Mr Armitage tied this to so-called “promoter activity” whereby companies are actively encourage to claim even though there there is a low likelihood of R&D taking place.
His view was that having an agent at the lower value end was more likely to be related to higher levels of error and fraud, whereas for higher-value claims it made no difference whether a company had an agent.
Overall, he was happy to estimate that the impact of HMRC’s operational changes was that error and fraud was reduced by ￡250m in 2023. The need to take action was clear.
Mr Armitage went through the different aspects of HMRC’s compliance response for R&D.
A range of interventions form the different parts of the model, and he wished to be transparent. These went from ‘scale’ (ie. bulk) to technical.
At the automated end, HMRC was carrying out sophisticated risking for whether an R&D claim was subject to fraud, and would stop a claim being paid out if it displays ‘signature traits’. He did acknowledge that this sometimes gave a false positive, and said that claimants would have the opportunity to share information.
At the next level, a project team within ISBC carries out a scale response which is task based rather than on a whole case ownership basis.?This is the same project which has resulted in a very scathing letter from the CIOT which highlights just how inept and damaging such a ‘task based’ approach can be in the hands of untrained staff.
However, Mr Armitage claimed it was “essential” to addressing the scale of the issue, saying that 50% of cases contain error or fraud and for 40,000 claims a year HMRC have to address this at scale. I notice the statistics are fluctuating somewhat.?
He claimed that there were now improved escalation routes so these staff could pass cases to a technical expert. He also claimed that, where needed, people could have phone calls and there was no block on this where it was appropriate. I’m not sure the R&D advisory industry have found these claims to be true.?
More technical cases with more complexity are still dealt with in Midsize on a ‘whole claim’ basis, ie with a named caseworker.
The anti-abuse unit announced by Government has been in place from April last year and aims to fundamentally drive out abuse by promoters. Mr Armitage highlighted HMRC’s determination to drive this behaviour out by using a range of powers and other “wider HMRC and cross-Government tools” to address the issue.
At the most technical and complex end, the Fraud Investigation Service aims to address criminality and enablers, running fraud projects. There have been a number of arrests.
This combination of approaches is thought to become much improved and more powerful with the additional information (AIF form) which will soon have to be supplied for all claims, which will radically improve risking indicators in a more targeted way. This will be a big opportunity and real gateway to risk assess claims more fully as some claims are still just a number.
Mr Armitage addressed questions around penalties where an agent is acting. He stated that, whatever the situation, the expectation is that the end customer will take reasonable care, and use of an agent does not by default mean that claimants will not receive penalty.
Using an R&D agent is not a “catch all” way to avoid penalties. The claimant must take care to understand what is happening on their behalf. They may not be involved in every element of a claim but are ultimately responsible. There was lots of fraud where people were represented and HMRC need to drive that out.
He mentioned there had been “a few questions” regarding the CIOT letter and HMRC will respond in early August.
He suggested that good claims for genuine innovation should “go through seamlessly”, and that it was in everyone’s collective interest to improve standards.
HMRC will give an update in Winter 2023 regarding new compliance measures.
Article written by:
Thomas Watson CTA, Compliance Director at MSC R&D
Lloyd Coulson CTA , Senior R&D Tax Manager at MSC R&D
Suzanne Clements , R&D Tax Credit Quality Assurance Manager at MSC R&D
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.
Partner - Tax Risk and Dispute Resolution - for HNWI, OMB and corporate disputes with HMRC
1 年The last lengthy response I received from HMRC deciding that a claim did not consistite an advance refered on a number of occasions to the client’s R&D activities in a very niche field. The client doesn’t even operate in that industry. I have little faith in the level of technical expertise working these enquiries I’m afraid when they are so clearly cut and pasting responses from unrelated cases. It ridicules the time and cost we and our client invested in putting together a decent detailed well thought out enquiry response to HMRC. As for agents being able to get someone on the phone to discuss a specific case? I’ll not dignify that with a response. Very useful summary/update though. Thank you!
MCS Corporate Strategies Ltd
1 年I found this report very interesting. It offers no relief worth having due to the several inherent uncertainty factors now proposed from the 1st April announcement and the reported Autumn statement on other issues and proposals. Not many companies will be tempted to make significant investments in research or development on the basis that HMRC might or might not reject it and demand back any tax reliefs given plus interest and a penalty to encourage the rest. It can come as a shattering blow for HMRC to demand back any tax reliefs paid on work and resources already completed. Few firms will be up for exposing themselves to arbitrary demands by HMRC that could drive them out of business. If the UK is not a place to carry out research and development, then it will move overseas to more welcoming regimes that offer certainty of outcome and a measure of integrity now missing from dealings and recent experiences with HMRC's crude blunderbuss approach of aim in the direction of some taxpayers, pull the trigger and bag anything you hit QED. The response to the CIOT letter looks interesting, but will that be summarily pushed aside as well?
Highly Successful Business Builder Delivering Sustainable & Profitable Revenues
1 年What annoys me about HMRC is they seem to create their own problems by not complete a basic due diligence on claims in the first instance to avoid Rev costs trying to get back money they shouldn’t have paid out in the first place. I remember taking a friend who worked at HMRC about VAT fraud which could have been reduced dramatically by checking the details of those registering against fraud cases but they did feel this was there job! Try setting up a business in the US where you have prove your ID first by using the individuals Social Security Number ….
UK co-founder at Rocking Horse - debt funding for early stage SMEs
1 年Extremely useful as always Rufus Meakin. Thanks to your team. Am I reading this wrong or is there a glimmer of hope that HMRC is listening to the industry about the problematic way they are approaching things right now, eg acknowledging the letter from the CIOT (and saying they will respond) and setting up a dedicated call centre? Also I would like to see the make up of their 85% processed in 40 days stats... ie does this mask their LIFO approach - put another way, the other 15% - how long do they take to be approved? 12 months or longer??
Trusted tax adviser specialising in R&D claims for manufacturing and engineering SMEs
1 年Looking forward to reading their response to CIOT letter which they have promised for early August although not that optimistic it will say anything useful or be constructive in any way.