R&D tax revamp must include the regulation of advisers

HMRC’s reforms to the Research & Development (R&D) tax credit system have led to a call for greater regulation of those offering advice and support to companies looking to submit claims. HMRC is redefining its approach to R&D following reports of extensive abuse, a claim backed up in its recent annual report citing that they believe almost one in six claims are fraudulent. The changes have prompted a call from Justine Dignam, Director of Incentives and Reliefs at Markel Tax, for HMRC to go further by imposing greater regulation on the individuals and firms offering advice to claimants on their R&D applications, a change that would help to root out those who have been supporting false and fraudulent claims. HMRC’s reform plans have already been criticised by the Chartered Institute of Taxation (CIOT) which, while it agreed the current approach is not working as it should, called for caution. Proposals for a new, merged, research and development (R&D) tax relief scheme from April 2024 have been described as “over ambitious” and risk undermining the policy aims of encouraging innovation and growth through R&D investment according to the CIOT. Policy papers and draft legislation were published in July for a consultation on a new merged single scheme for R&D, along with additional tax relief for small and medium-sized enterprises (SMEs). This prompted a response from David O’Keeffe, Chair of the CIOT’s R&D working group. “We strongly urge the Government to slow down the timetable for this reform,” he explained. “An implementation date of April 2024 is over ambitious, will present practical difficulties for HMRC and taxpayers and will result in unintended consequences. In particular, the short timescale will not allow businesses time to properly prepare for the new rules.” Dignam believes that it is understandable HMRC would seek to react given the scale of the relief erroneously paid in the 2020-21 financial year but believes that several other planned HMRC changes should also be reconsidered. “One example is HMRC’s argument that if a company does not consult it before making an R&D claim, the company can be considered to have behaved carelessly. In fact, as the letter sent from the CIOT points out, case law and HMRC’s own manuals state that this is not a requirement of making a claim. The letter also notes that HMRC do not have the resources to provide this advice.” Her main concern, however, is over the regulation of advisers: the root cause of the problems with the scheme from her perspective. HMRC’s annual report revealed a significant rise in losses from error and fraud in R&D tax relief. For 2020-21, losses were estimated to stand at £1.13 billion, or 16.7% of claims – “significantly higher than the previously published estimate” of £336 million, or 3.6%. “It is all very well looking at significant changes such as a merged approach but fraud is rampant and HMRC should be tackling that as a priority before being to be too ambitious in other areas,” said Dignam “For HMRC to disclose that error and fraud accounts for over £1 billion of R&D claims shows their approach to R&D claims is not working, despite their ramping up of R&D claims compliance and around 300 inspectors now in place,” Dignam added. “This is a big problem for HMRC and it’s clear that registering and regulating R&D providers to ensure a sufficient standard of competence and expertise exists is a logical way forward.” Stuart Brodie, Director of Tax, Markel Tax explained: “The estimate that error and fraud in R&D claims for 2021 has jumped from 3.6% to 16.7% is a massive admission from HMRC. That means they think one in every six claims is fraudulent. It's hardly any wonder that HMRC are now coming down hard and looking into more and more claims.” Dignam believes the situation has increased risks to claimants as HMRC launches more investigations into claims they believe may be erroneous. “Some claimants may have been wrongly advised that a claim is legitimate, putting their organisation at risk if HMRC launches an investigation. Genuine claimants may also have to invest the time and effort to cooperate with HMRC if investigated and those with a legitimate claim may be deterred from applying in the future,” Dignam concluded. Justine Dignam is the director of incentives and reliefs at Markel Tax. She is responsible for driving the development, growth and management of the tax Incentives and relief division at Markel Tax.