R&D Tax Credits face cuts following outrage at spurious claims

The significant problems facing the UK Government’s flagship R&D Tax Credit scheme were laid bare in yesterday’s House of Lords Finance Bill Sub-Committee session.

After nearly a decade of believing their own publicity, the R&D Tax Credit advisory industry now has to face the harsh reality that the prospect of exponential growth in R&D Tax Credit claims was always an illusion.

In a previous session, the House of Lords Sub-Committee had heard that R&D Tax Credit advisors and accountants collectively take fees equivalent to 16% of the value of all R&D Tax Credits claimed which, if true, would make the R&D Tax Credit advisory sector worth over ￡1 billion annually.

Such a large market, with exceptionally low barriers to entry, was always destined to attract entrepreneurs who would find creative ways to attract new clients by promoting R&D Tax Credits as “free money from HMRC" with “100% success rates”.?R&D is often described as being “not just for men in white lab coats" and "95% of eligible companies don’t claim".

(A previous witness to the Committee, Neil Ross of techUK, had described the R&D Tax Credit advisory market as like “the Wild West” and complained that “if you Google ‘R&D Tax Credits’ you get 4 pages of R&D Tax Credit advisors before you get to anything from GOV.UK”)

All this aggressive sales and marketing activity created a massive growth in the number of R&D claims being submitted (which I wrote about in a previous article “The truth behind the growth of R&D Tax Credits ”).?

This situation now looks untenable from a Treasury perspective and the government is clearly spooked by estimates that the scheme could cost up to ￡9 billion per year by 2027.?

Some changes to the scheme have already been announced and are part of the draft Finance Bill 2022-23.?The House of Lords Sub-Committee decided to look into these R&D Tax Credit reforms with a key question being how effective the changes might be in countering error and fraud resulting from so-called spurious R&D claims.

Since the inquiry was launched, there has been widespread national coverage of dubious-sounding R&D Tax Credit claims, covering everything from Blueberry-flavoured croissants to cocktail bars, local gastropubs and launderettes.?

In this context, the R&D advisors chosen to give evidence before the Committee were always going to face some tough questioning.

The Committee questioned two key witnesses from R&D Tax Credit advisory firms - Jennifer Tragner of ForrestBrown and Nigel Holmes of Catax.?

It was clear from the outset that the Committee was suggesting that the R&D Tax Credit advisory industry is partly to blame for the boom in the scheme and the associated spurious claims.?

In what turned out to be an open goal for the Committee, Nigel Holmes, Director of Tax at an R&D Tax Credit advisory firm called Catax, was asked to explain why his firm has been promoting a message on its website that states:

• The Treasury “owed” Britain’s small businesses more than ￡84 billion in backdated R&D Tax Credits
• More than half of all the UK’s businesses are eligible for R&D Tax Credits with nearly 2 million SMEs “owed money” by the Treasury
• “Unclaimed” R&D Tax Credits were valued at twice the annual budget of the Ministry of Defence and enough to run the NHS for eight months

The Committee wanted to know specifically whether this survey, undertaken by Catax and widely publicised, had encouraged the submission of spurious R&D Tax Credit claims.

Mr Holmes said that he didn’t control his company’s website however he admitted that the ￡84 billion in unclaimed R&D Tax Credits “sounds very high” and that it may have led some people to get the wrong end of the stick.

The Committee was determined to press home the point that the R&D scheme could get out of control if every company who thinks they could potentially claim R&D then went on to make a claim.

Mr Holmes was then asked to provide the Committee with a note to explain the basis of the “￡84 billion in unclaimed R&D Tax Credits” story on the Catax website.

When asked what could be done to crack down on abuse, Mr Holmes said that HMRC should adopt a more focussed approach by targetting the advisor rather than the claimant.

The Committee moved on to the role played by R&D Tax Credit advisors charging contingency fees and whether this might have encouraged boundary-pushing by advisors.?

In Mr Holmes’ opinion, contingency fees are fair whilst Mrs Tragner also defended their role and said it was more about the behaviour of certain agents that caused problems and that contingent fees are normally priced relative to the work involved in handling the claim.

Mrs Tragner called for a simplification of the scheme and targeted compliance where required. She also stressed that the R&D scheme guidelines need reviewing and in particular the definitions of what qualifies as R&D need to be updated.

The Committee also appeared to be deeply concerned about the existence of a number of “software systems” which automate the process of compiling an R&D Tax Credit claim.

To some of us in the field, it has been clear that the Treasury has been looking to limit the cost of R&D Tax Credits for some time.

As I wrote in an article last month, with the Government’s target of 2.4% “R&D as a proportion of GDP” figure appearing to have been achieved several years early, the government might see an opportunity to reduce the generosity of R&D Tax Credits.?

The continuing negative publicity around R&D claims being made for activity that is clearly not Research & Development has now given the Treasury an additional reason to curtail the overall cost of the scheme.

Unfortunately, this will have the knock-on effect of making the UK a less attractive place for innovative companies to set up and do business.

Rufus Meakin is a specialist in helping companies prepare large and 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