A&M Tax Advisor Update
Suspension of payments for “irregular” R&D tax claims
This announcement by HMRC on 16 May 2022 has caused a stir in the R&D tax market, and quite rightly so. Greater transparency on the term “irregular” will help the market better understand why HMRC is delaying certain payments and provide greater visibility to claimants and advisers to deliver “regular” claims. Given previous statements by HMRC on where fraud is likely to arise, it would suggest that claims for the SME cash credit will be targeted in particular, which is further reinforced by the measures currently being implemented by HMRC and discussed in the following section. After the economic shock of the pandemic, and going into what increasingly threatens to be a recession, cash funding for R&D is vital. It would be deeply regrettable if the delay measures, coupled with the actions of fraudulent claimants, prevent the regime from functioning at a time when it is most needed.
Measures to reduce erroneous and fraudulent R&D claims
What slipped under the radar in the market is the recently published Public Accounts Committee’s (PAC) scrutiny of HMRC’s latest financial statements i.e. section 2 of the Treasury’s minutes on the 37th report of Session 2021-22 – Treasury Minutes – CP 667 (publishing.service.gov.uk). Building on HMRC’s recent messages on greater scrutiny to identify errors and fraud in R&D tax claims, HMRC is recommended to (1) improve their understanding of the cost of the R&D tax relief and (2) define specific measures on how to reduce the levels of error and fraud.
1. All experienced R&D advisers will have come across claims that contain significant errors, and even if not clearly fraudulent, they are at best not prepared with the level of diligence required. Estimating the level of error and fraud will always be challenging for HMRC but the initiation of the Mandatory Random Enquiry Programme [MREP] makes it clear that there is little trust in HMRC’s current estimate of £336m of claimed expenditure being erroneous or fraudulent. As MREP is only targeted at SMEs, it is likely that this population of claimants will face an increase in enquiries at a time where these are the companies that need more support, and not time-consuming scrutiny.
2. Given the volume of R&D claims, HMRC will always face a trade-off between operating the regime efficiently (i.e. settling claims promptly) and policing the accuracy of claims. However, even with the additional inspectors that were announced a couple of years ago, HMRC is clearly playing catch-up. The involvement of an additional 50 resources, collaborating with HMRC’s Fraud Investigation Service, is to be welcomed, though the extent to which this is ‘too little too late’ may be the subject of future PAC scrutiny. The requirement for more detailed claim substantiation, the endorsement of a named senior officer, and enhancements to HMRC’s risk profiling, clearly demonstrate HMRC is taking this seriously. An education programme is also a positive sign, and hopefully they continue to collaborate with the industry to deliver this.
At A&M, our experienced UK R&D tax team (each with at least 7 years) can keep you updated on regular updates in this field and also provide a “fresh pair of eyes” on your existing R&D claims if you seek further reassurance.