HMRC intensifies focus on challenging innovation tax relief claims

While the Government is rightly eager to incentivise companies to innovate and develop new technology, tax reliefs that offer payable credits are sadly often also attractive to those who wish to take advantage of the system by making fraudulent or exaggerated claims. The 2020/21 National Audit Office statistics estimated the annual cost of research and development (R&D) fraud to be £336m.

Alongside the proven cases of fraud, we have also seen R&D claim services being aggressively marketed to businesses and their main advisers, in some cases with little effort being made to assess whether a claim is appropriate.

While the legislation and primary guidance around what expenditure qualifies for tax reliefs for innovation may be open to some interpretation, it is also an area where the detailed guidance and specialist professional support available should ensure that businesses have nothing to fear in making appropriate claims.

HM Treasury, in its R&D Tax Reliefs report of November 2021, has suggested several changes should be introduced from April 2023 that will require better levels of disclosure when submitting R&D claims. Many businesses and their advisers already make adequate and appropriate disclosures and the proposals will have little impact on them. However, for those who do not, they may prompt more accountability and diligence when preparing claims. The proposals include the need for R&D claims to be made digitally and include much more detail around how they qualify for relief. The report also proposes that these digital claims would need to be specifically formally endorsed by a senior officer of the claimant company and give details of any agents who advised the company in compiling them.

As is often the case, the actions of a few in promoting and submitting fraudulent or unsubstantiated claims impact the many who make genuine claims for tax relief. Recently we have noted a significant rise in the level of compliance activity by HMRC in reviewing R&D claims, with increased scrutiny being applied across the board. A new team is being established within HMRC, specifically targeting perceived abuse of the R&D tax reliefs. The chance of an enquiry from HMRC, especially in respect of larger claims, is therefore high, and such reviews can be detailed and long-running. Where HMRC identifies errors in claims, penalties can also apply.

Whilst it may add to the burden for some genuine claimants , this additional compliance activity by HMRC is nevertheless welcome, as more scrutiny of poorly documented claims is likely to be a better, more targeted approach than simply making the legislation more onerous to comply with. Increased compliance requirements might well reduce abuse of the system but is also likely to impact a much wider population of genuine claimants.

Engaging with the right adviser, investing in the process of making a claim, and ensuring appropriate disclosure will help reduce the risk of enquiry. However, should HMRC ‘come knocking’ (and it is likely in the current climate that it will), early advice and support is essential, not only to the smooth running of the enquiry, but also in negotiating the level of penalties HMRC might seek to charge and any available mitigations.