Has the music stopped for R&D Claims? HMRC Crackdown!

After years of seemingly giving a free reign over R&D claims with very little scrutiny, HMRC are now shifting significant resources to their Research and Development Anti Abuse Unit.

The new unit is dedicated to reviewing R&D claims for both small and large companies. HMRC estimates that the total monetary value of the R&D expenditure that has been erroneously or fraudulently claimed during the financial year ended 31 March 2022, was £469m, which equates to 4.9% of total R&D tax relief expenditure for the financial year.

Heavy Handed Approach

HMRC are now sending one-to-one enquiry letters checking companies’ R&D claims, and indeed some have been issued by HMRC’s Fraud Investigation Service, who normally deal with cases of suspected fraud and have the power to carry out criminal investigations.

In several recent articles, there have been warnings to various industries about R&D, urging companies to think twice before applying for relief.

However, this has led to a concern that legitimate claimants have been put off from applying.

Reliance on Third Parties is No Defence

The main issue seems to be that HMRC are applying penalties where they feel an R&D claim has been made, when there is no actual R&D to be claimed, even when a third party has been used for this claim.

There is some disagreement between tax professionals and HMRC that a penalty can be applied in these circumstances. However, the extract below from a letter recently received by a client seems to make clear HMRC’s position on the matter:

“You failed to adequately consult HMRC’s guidance at CIRD8000, you relied upon advice given by a third party and did not contact HMRC directly, before submitting your claim to R&D tax relief. I have therefore, been unable to conclude that reasonable care was taken when you submitted your claim to R&D tax relief in your tax return”

Conclusion

There is no doubt that there is going to be greater scrutiny of R&D claims moving forward. As a Director, you should now make yourself certain that there is genuine R&D taking place within your business before making a claim.

If there is genuine R&D taking place, then a claim should be made, but beware of third-party R&D “specialists” who promise the earth.

Finally, if you haven’t submitted your current year R&D claim and you feel it might be potentially dubious, just be aware that if HMRC reviews it and apply penalties, they also have the power to look into any previous claims.