Fraudulent, or otherwise incorrect, claims for R&D tax relief have been the subject of much negative press in recent years, with HMRC increasing “the level of scrutiny” of such claims. Here, we examine the problem in more detail, and discuss what to do if you or your business has received negligent advice.
In the early hours of 25 September 2024, the offices of a Norwich-based company offering tax relief services were raided by HM Revenue and Customs (HMRC).
The company was under suspicion of tax relief fraud, with the warrants and subsequent eleven arrests “just one small part of the comprehensive and wide-ranging action we’re taking to tackle suspected R&D fraud,” according to Jonathan Smith, HMRC’s director responsible for agent compliance.
What is R&D tax relief?
Research and development (R&D) tax relief schemes were introduced to support innovation which, according to HMRC, is “at the heart of the government’s plan to grow the UK economy”.
Currently, there are two schemes for accounting periods starting from 1 April 2023: a “new” or “merged” RDEC (R&D Expenditure Credit) for all SMEs and large companies that are not R&D intensive loss-making SMEs and an enhanced R&D Intensive Support (ERIS) for R&D intensive SMEs.
Both of these schemes are administered by HMRC and aim to support companies that are working on “projects in science and technology”, whether that is a new process, material, device, product, or service, or an improvement to an existing one.
Since these schemes were introduced, the number of R&D claims has increased year-on-year. In fact, in its Research and Development Tax Credits Statistics, published in September 2024, HMRC estimates that around £7.5bn in total support was claimed through the schemes for the tax year 2022/23.
What is R&D tax fraud?
In 2021, the UK Government launched a review of the schemes following concerns of “abuse and boundary-pushing involving R&D tax reliefs”. Subsequent research also identified that almost half of all claims by volume contained an element of non-compliance, with a quarter of these fully disallowed as no qualifying activity had taken place.
Furthermore, according to estimates within its annual report, HMRC believes that the level of error and fraud for claims in the tax year 2023/24 has been 7.8% for R&D reliefs overall, equating to around £1.3bn. For SMEs, the estimated level increases to 14.6%.
While HMRC stated that the majority of non-compliance was down to error, it also highlighted a growing prevalence of agents and advisers who sought to “abuse the R&D reliefs” by encouraging their clients to make claims for which they were not eligible.
How is HMRC responding to R&D tax relief issues?
For clients who may have received advice from such an agent or adviser, this will no doubt be concerning, particularly since HMRC has introduced a wave of new measures and operational changes over the past three years.
This started with HMRC significantly increasing its operational resource for reviewing, auditing, and investigating R&D claims. In 2022, for example, HMRC introduced an R&D Anti-Abuse Unit to deal with incorrect claims, as well as enquiries into complex cases.
The process for making a claim has also changed, with pre-notification requirements and claimants now required to submit additional information alongside their claim, as well as a named officer of the company and details of an agent or adviser associated with the claim.
Despite the high volume, HMRC’s scrutiny of R&D tax relief claims is intensifying, with more claims undergoing in-depth review. Following its creation of a Mandatory Random Enquiry Programme (MREP) for SMEs (a group that is responsible for the majority of non-compliant claims), HMRC is now understood to be enquiring into 20% of R&D claims and even around 50% in some sectors.
What are the risks for businesses and their advisers?
This leaves claimants at risk of penalties if mistakes were made within the claim, such as a misunderstanding of what HMRC’s acceptance of claims involves or claiming under the wrong scheme.
Small wonder, then, that HMRC has issued nudge letters prompting businesses to review submitted R&D claims and, if necessary, correct any errors. Many businesses will have also received letters requesting specific information or clarification.
These letters must not be ignored, and businesses should aim to respond as quickly as possible to avoid further enquiry. Furthermore, any penalties imposed by HMRC may be reduced if a business is responsive and cooperative, whereas deliberate attempts to conceal incorrect claims could face penalties of up to 100% of the tax due.
What can businesses do if they’ve received negligent advice?
If a claim is deemed non-compliant, the resulting tax must be paid alongside any penalties and interest. For SMEs in particular, the financial consequences could be devastating.
There may, however, be potential to claim against an adviser for breach of contract and/ or negligence if the business sought advice at the time of making the R&D claim.
The scope of contract with the adviser should first be considered, particularly its express terms and any limitations of liability.
Under section 13 of the Supply of Goods and Services Act 1982, for example, there is an implied duty to exercise reasonable care and skill, with most contracts containing an implied term that the person providing the services will do as such. Special skill can raise the standard of care, as can professional standards.
Claims may also be made in Tort, providing a claimant can demonstrate that a duty of care existed, this duty was breached, and that this breach was directly responsible for any subsequent loss for the claimant.
What can accountants or advisers do if a third party has acted negligently?
In some cases, accountants advising businesses may have referred their clients to, or sought advice from, a third-party purporting to specialise in R&D tax relief.
An accountant may still be found liable in such instances, as demonstrated in Knights v Townsend Harrison Ltd [2021] EWHC 2563 (QB).
Here, the claimants alleged that their accountants had been negligent by introducing them to a promoter of tax schemes that failed to perform.
The judge suggested that an accountant may owe a duty to not introduce an unsuitable client to an unsuitable tax scheme and that there may be circumstances in which the nature of the professional relationship meant that the accountant should also give advice in relation to the tax scheme and its implications. It would need to be shown that, in the circumstances, the accountant had assumed responsibility for these matters.
How can we help?
Gateley Capitus and Gateley Legal work side-by-side to help businesses and advisers with any R&D tax-related issues they may face.
If you have received a letter from HMRC or have any concerns regarding the advice you have received, our R&D team within Gateley Capitus can advise you on next steps and help you cooperate with HMRC.
Our professional negligence team within Gateley Legal can advise you in respect of any claim that can be made against advisers and how best to protect yourself in relation to any limitation or recoverability issues that may be faced, particularly with unregulated and uninsured firms.
Given that HMRC can potentially review claims going back years, now is the time to conduct a thorough sense-check of all claims made for R&D tax relief.
Acting now will put you in the best possible position for what comes next, whether that is responding to a request from HMRC, or making a claim against a negligent adviser.