Spurious R&D claims an unbelievable drain on company resources

Abuse of the tax system will highlight the value of trustworthy advisers


 Spurious R&D claims an unbelievable drain on company resources

The significant time and resource loss associated with HMRC inquiries into potentially fraudulent research and development (R&D) claims highlights the need for enhanced diligence.

The finances, depending on the claim, could be significant, but the resources required to deal with an inquiry are just unbelievable.

And when you’re doing that alongside dealing with things like furlough and covid, you can’t focus on running the business.

HMRC figures show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).

Although, in theory, this paints a positive picture of innovation in the UK, a suspected uptick in spurious claims has sparked concern.

For instance, of the 85,950 R&D claims made, 85 percent were less than £100,000 in value – conceivably an indication of suspicious activity.

The role of external advisers

Increased abuse of the R&D relief system will inevitably highlight the value of capable and trustworthy advisers.

We hear stories where the end company will make the claim led by the provider, and then the provider will say ‘well it’s your claim, if you didn’t think it was right, you shouldn’t have done it’.

To ESB, that’s not right. We, as a professional adviser, are responsible for explaining what’s going on and ensuring that the client understands everything.

A competent provider will have that to hand because that’s what gets submitted to HMRC to show what expenditure has been included.

That’s a key area – it gives the client certainty that we’re in it for the long haul. We’re here to build ongoing relationships with people and do the right thing for them.

The key role for advisers is to ensure that the right companies are claiming the right amount of tax. That’s why we’re not afraid to say ‘no’ to clients – if we’re not confident about the claim then we won’t submit it.

A changing landscape for R&D Claims

While the UK government has historically encouraged businesses to claim R&D relief, the indications of spurious activity have sparked a recent change of tone.

First, to prevent misuse and ensure that the right amount of relief is being claimed, HMRC installed 100 new officers to its compliance unit in 2021 a move which, according to Clark, encapsulated the shift in stance.

HMRC have got limited resources, but they’re still acknowledging that this needs more attention because the system is open to abuse.

Further to this, efforts were made to strengthen the system in the 2021 Autumn Budget. As a result, the scope of the R&D scheme will be “refocused” to target domestic innovation. At present, UK companies can file for relief based on developments that have been carried out by overseas sub-contractors.

In addition, Chancellor Rishi Sunak announced that the definition of R&D costs that are eligible for tax relief will be extended to include cloud computing and data.

The amendments to the scheme will take effect from April 2023.

But regardless of what’s happening on the legislative side, it’s always partly incumbent on the organisation to remain conscious and vigilant of fraudulent activity.

It’s just about having that stop and check moment and thinking, ‘my accountant whom I work with on a month-to-month basis doesn’t think that I qualify, so how can these cold-callers who don’t know me think that I do?’.

Please talk to us at ESB Accountancy to discuss how your business can comply with the new tax, finance and accounting laws – with several decades of financial experience here in Gloucestershire you can either ring us now on – email us on edith@esbaccountancy.co.uk or click the Contact Us buttonpayroll bookkeeping services small business help contact esb accountancy gloucestershire cheltenhamor please fill the form at the bottom of the contact us page.

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