R&D Tax Credit Enquiries – Expect Delays

As everyone will be aware by now, there have been changes afoot in the way that HMRC have been dealing with R&D Tax Credits this year.

HMRC discovered fraudulent claims, some of which they said were linked to organised criminal gangs and as a result, they temporarily paused all R&D tax credit payments on the 28th April.?

At Accountech, we have processed many R&D Tax Credit Claims – over ￡3million of claims in the past 6 years – but we had our first ever enquiry in May this year.

This came from the National Audit Office. The HMRC officer that we spoke to explained that this was a completely random selection based on the client’s UTR so they would not even have known the name of the company selected.

These were some of the comments made by HMRC during their correspondence on this enquiry:

“The reports and record keeping that I’ve witnessed during this particular enquiry are exemplary when comparisons are made so, for this, I congratulate both you and the company. The steps that you are taking to ensure compliance and reduce the risk of error are commendable.”

“Looking to the future, I have no problems with the way Accountech present their R&D reports and submissions if this is an example of your work.”

In June though, one of our clients received a more concerning letter, this time from the Fraud Investigation Service, which included the following intimidating language:

“The claim triggered an alert on our systems and has caused HMRC to believe that you have fraudulently claimed money to which you are not entitled. Therefore HMRC has blocked payment of this money, to which we believe you are not entitled. If you think that you are entitled to this money, then you need to contact HMRC as a matter of urgency so that we can re-examine your claim and consider reinstating your payment.”

“At this time, HMRC has not opened a criminal investigation into this suspected fraud. However, you should be aware that HMRC reserves the right to open a criminal investigation into any suspected fraud committed against the R&D scheme. If HMRC did open a criminal investigation in respect of your claim in the future, then any investigation could use as evidence anything that you have said to HMRC about your claim. I mention this only so that you are fully aware of the position should you decide to contact HMRC and to avoid any confusion.”

The letter requested additional evidence within 30 days of the letter, which as we had already submitted our usual back up documentation, consisted of copies of every invoice included in the claim plus copy bank statements as proof of payment - a level of detail in back up information far in excess of what is normally required to support a claim. This evidence was submitted on 7 July.

After numerous chasing emails, with replies stating only that the claim was being assessed, we were informed that the claim had been transferred to WMBC on 2 September and then on 27 September that it had been assessed by WMBC and released for payment and payment has now been received, 5 months after the original R&D Tax Credit Claim was submitted as part of the company’s Corporation Tax Return. No further information had been requested by HMRC during the time between the original response to the FIS and payment of the claim.

These letters from the Fraud Investigation Service were apparently sent out to thousands of companies and were selected based on the value of the claim and the SIC code of the company claiming.

While I do not have any issue with the need to address what appears to have been a flagrant abuse of the system, the way that it was done leaves a lot to be desired and the scattergun approach will have affected many other legitimate claims as well as those of our own clients. It seems completely unfair to send such threatening letters to legitimate claimants with no supporting evidence especially when start-up founders are already under considerable pressure just now with the cost of living crisis and more difficult conditions for investment. Any tech companies caught up in this will have seen not only a delay in receiving the cash due back to them but also increased costs from their advisors in dealing with the enquiry.

There is a need to clamp down on the abuse of the system but this would seem to be better served by having more resources within HMRC to better evaluate R&D tax credit claims and also perhaps by having some sort of certification or qualification that R&D tax credit advisors should take before being allowed to make claims.

Sarah Gardner from Allegro Tax, whom Accountech partner with to enhance our specialist tax support for tech companies, shares our view on the damage that could be done by delaying legitimate claims from small companies but has seen encouraging signs of the system improving again more recently:

“We support accountants with specialist tax support, including in relation to R&D tax credit claims in a variety of sectors. I welcome the increased focus on the R&D scheme by HMRC as it was clear that there were a number of unscrupulous advisers submitting claims which had no merit. It is a shame, however, that small companies are waiting many months to receive repayable credits, on which they often rely. The system is designed to support and encourage them in undertaking R&D activities and the repayable credits are not simply a ‘nice to have’ additional sum.

Moving forward I would like to see the enquiries being opened in a more targeted manner to ensure that only those claims where there is a genuine risk of fraud are investigated rather than companies whose claims display no risk factors having to deal with enquiries. Our clients are starting to see the R&D credit system moving again which is a welcome relief for the small businesses involved.“

Inefficiencies of Current System in Rewarding R&D Expenditure

Furthermore, the current arrangement that has evolved of R&D tax credit advisors taking 25-30% of the R&D tax credit claim as their fee seems a most inefficient method of encouraging R&D expenditure. For larger companies, R&D Tax Credit Advisors can assist in obtaining R&D Tax Credit Claims for their internal processes which fulfil HMRC criteria as R&D. However, for tech start-ups doing R&D, they should not need to give away as much of the benefit of R&D Tax Credits as they should be able to find accountants specialised in R&D tax credits who can do the claims as part of the corporation tax returns that they are filing anyway. Also they can allow client staff to write the technical description of the R&D performed so that the tech company itself retains the majority of the benefit from R&D Tax Credits. Every penny is important to start-up tech companies and R&D tax credits should not be seen as an unexpected bonus but as funding that they are entitled to which they do not need to give away a large percentage of, in order to claim.

When deciding on who to use for claiming R&D tax credits, tech start-ups need to ask:

• What is the advisor’s record of claiming R&D tax credits for other similar companies to their own?
• What CPD training in R&D Tax Credits has the advisor undertaken within the last 6 months?
• Who are the staff doing the work and what experience do they have of making claims? There have been a lot of R&D advisors switching firms recently in the “great resignation” so do not rely on past reputations.?
• What is the methodology used for making claims and how much of the claim will the advisor take as their fee?

Towards Certification for R&D Tax Credit Advisors - The R&D Community

?Accountech are members of the R&D Community.

This gives us access to excellent training resources on R&D tax credits, a network of R&D tax credit advisors that can compare notes on best practice, and templates that can be given to client staff to enable them to describe the technical aspects of R&D projects in the manner that HMRC need to meet their definition of R&D.

The R&D Community are leading the way in developing training in R&D Tax Credits and are?aiming to develop an accredited certification for R&D tax credit advisors.

Richard Edwards from The R&D Community commented:

?“There is so much confusion and bad practice in R&D tax relief, yet very little specialist training, help and support for R&D advisors. We are working hard to fix that. In collaboration with our members, we are developing the training?pathways and?certification routes that will allow?ethical?R&D advisors to test, improve and demonstrate their knowledge and competence in a very crowded and often unethical market."

The Future for R&D Tax Credits

Further reforms to the R&D Tax Credit Schemes can be expected. The Large Company Scheme apparently has a better record at increasing R&D expenditure but arguably it is the SME scheme that makes more difference to our economy due to the importance of these funds for our smaller tech companies. There is talk of a rebalancing of the schemes towards larger companies rather than SMEs but that would be a mistake. For all of its faults, the recent Mini Budget made some important reforms to the SEIS and EIS schemes to encourage tech companies – let us hope that they build on that further to reform R&D Tax Credits and encourage more Research and Development in the right way too.