HMRC still failing to act over R&D Tax Credit fraud

Guest article written by Paul Rosser , Director at Research & Development Consulting Ltd

Over the last couple of years, thousands of unsuspecting R&D Tax Credit claimants have seen their claims rejected outright by HMRC and are now facing large tax repayments as a result.

Many of these R&D claimants have been hoodwinked into filing invalid R&D claims by so-called rogue advisors who prey on companies though false advertising, cold-calling and promises of easy money.

“Why is HMRC allowing this to continue?" is a question increasingly being asked by companies effected by these fraudsters.

This is a very good question.

When HMRC increased its compliance activities in 2022, most of the decent R&D advisors I know weren't exactly happy at the prospect of more compliance checks into their clients’ claims but they saw it as a necessary exercise to give HMRC the evidence they needed to shut down the rogue advisors.

More than a year later, little has changed - at least visibly.? A few advisors have liquidated or vanished but most of those submitting less than honest claims are still trading.

What is a fraudulent R&D claim?

Any R&D claim which isn't 100% correct can be considered inaccurate but this doesn’t necessarily mean the claim is fraudulent.

For an R&D claim to be considered fraudulent, either the claiming company or their advisor would need to have known the claim was inaccurate before submitting it.

Over the past year, I've been asked to check the validity of over 100 R&D claims and in most of these cases a third-party advisor, who wasn't the claiming company’s usual accountant, had been engaged to prepare the claim.

When assessing R&D claims, I usually find they fall into one of four categories which I have listed below.? I've also included some percentages to show the split between these based on claims I've reviewed in the past twelve months:

• Valid:? Everything about the claim looks correct, the legislation has been followed and all of the costs have been dealt with correctly (10%)
• Inaccurate - Minor discrepancies: The projects appear valid, but there are a few minor mistakes with either the technical side or calculation of costs (15%)
• Inaccurate - Major discrepancies: Some of the projects don't appear to be valid and/or there are fundamental mistakes with the calculation of costs (20%)
• Invalid: None of the projects are valid, or the expenditure being claimed is totally invalid (55%)

The first two categories are nothing to worry about.? Ideally, all claims would fall into the first category but I've yet to meet any R&D advisor (me included) who could honestly say that, under scrutiny, none of the claims they have prepared wouldn’t have minor inconsistencies.?

Mistakes can happen but these are usually trivial and if spotted and rectified should make little difference to the claim benefit.

The last two categories however are very worrying.?

In the case of major inconsistencies, these usually come down to the advisor not applying all the various rules when calculating a company’s expenditure – either through misunderstanding or laziness.?

Common such mistakes include miscalculating connected party costs or including costs which have not yet been paid/settled which is not allowable.? Potentially, some of these could be considered fraudulent although in my experience, it tends to be more a case of ignorance rather than intentional deceit.?

It’s the “Invalid” category that contains the most fraudulent claims – where the claim had no merit and should not have been submitted.?

Between 15 June 2022 and 21 September 2022, HMRC Fraud Investigation Service (FIS) wrote to 1,685 claimants to say that their claim had triggered an alert on HMRC systems and had caused HMRC to believe that they have fraudulently claimed money to which they are not entitled.?

HMRC considered this activity a success, stating that it protected at least ￡46 million of public money.

No detail has been given with regards to penalties any of those claimants may have received but I wouldn’t be surprised if there were very few or none at all as most would have been prepared following advice from an accountant or specialist R&D advisor.

Penalties for inaccuracies on a Corporation Tax return will not be charged if the claiming company took reasonable care to get things right.

In the vast majority of the claims I've reviewed which were invalid, the claiming company had no idea as they had taken the advice of what they believed was a reputable tax advisor.?

Even if initially they had some doubts, the advisor had convinced them that they were undertaking qualifying R&D and so should let them assist in the preparation of a claim - in exchange for a fee of usually between 20% and 50% of the claim value.

HMRC states that “asking us or a tax adviser if you’re not sure about anything and following any advice given” constitutes reasonable care and when HMRC have been challenged for going against this reasoning it has lost, as evidenced at the recent tribunal H & H CONTRACT SCAFFOLDING LTD Vs HMRC .

What about the advisors though?

If an advisor convinced a company to file an R&D claim they knew was invalid then they could be charged with facilitation of tax evasion, which is a criminal offence and broadly defined as:

"a person must have deliberately and dishonestly helped another person to evade tax. This does not include the accidental, ignorant or negligent facilitation of tax evasion."

Even during my checking of a relatively small number of R&D claims, when compared to the total number submitted per year, the same advisory firms keep being identified as those behind invalid claims.

So, back to the question "why is HMRC allowing this to continue?", if I can identify some of those responsible from a very small sample size, it must have enough evidence by now to take action against those responsible.

In fairness to HMRC, it can be a bit of a cat and mouse game as fraudulent R&D claims are big business with the worst offenders making ￡ millions per year - often via a network of connected companies.?

If one company starts to attract too much attention, they will simply start offering the services via a different company instead.?

One advisor involved with a dozen entirely invalid claims I've reviewed has at least eight connected companies set up, all trading from the same address and with most of these offering R&D Tax Credit advisory services.

Additionally, it could be hard for HMRC to determine which advisors are knowingly submitting invalid claims as opposed to those amateurishly applying the legislation inaccurately.

However, even when HMRC noticed that some advisors were specifically targeting sectors which were highly unlikely to qualify for R&D Tax Credits, such as care homes and restaurants, and sent out a “one-to-many” letter to companies in those sectors during 2023, no action seems to have been taken to stop those advisors.

Some of these advisory firms are still trading now and until a few weeks ago were still advertising to care homes and restaurants!

Unfortunately, no-one (outside of HMRC) seems to know why the advisors who have been involved in submitting high volumes of fraudulent claims are allowed to continue.

We can only hope that HMRC is taking action and we just don't know about it yet.?

Building a case strong enough for a criminal conviction for fraud does take time and this needs to happen to both stop that particular advisor from continuing and to act as a deterrent to others either tempted to or already stealing public money in this way.

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Guest article written by Paul Rosser

Paul Rosser has been in the R&D Tax Credit field since 2010 and is a Director at Research & Development Consulting Ltd.

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