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Are your SME clients at risk with new HMRC enquiries into R&D tax claims?

Author: Tom Mason

“In HMRC’s effort to clamp down on fraud and error, there is a general view building, particularly coming from start-ups and small businesses, that it is putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief, delaying payments and clawing back tax credits, especially given the time that involves.”

These are the words of John Baron, MP for Basildon and Billericay at a recent Treasury Committee evidence session, reviewing some of HM Revenue & Customs (HMRC)’s latest tax measures.

Mr Baron cited specific examples in which entrepreneurs were ordered to repay five and six-figure sums to HMRC, including fungus research company, Really Clever.

Some firms, he said, were subsequently considering a move overseas.

He further criticised HMRC for conducting around two thirds of its compliance checks after making payments to businesses, which can have a significant impact on the cash flow of SMEs in particular.

You may find that clients are similarly alarmed at the R&D tax landscape and approach you with concerns over their eligibility to claim.

We’re going to look at the view taken by HMRC and our perspective, based on substantial experience and practice-based expertise in the R&D tax space.

What is the view of HMRC?

Answering Mr Baron’s query was Jim Harra, Chief Executive Officer of HMRC.

While accepting the policy objective of “promoting innovation and business investment in R&D”, he also recognised the “unacceptably high level” of error and fraud within the scheme and the need change the way that claims are assessed.

This won’t come as a surprise to you or your clients, as this data is what drove the HMRC crackdown – with error and fraudulent claims costing the Treasury £1.13 billion in 2020/21.

However, clients may need to be updated that HMRC plans to publish a compliance plan soon, which you can use to further direct your approach to preparing and submitting claims.

The outcome? Striking a balance

‘Balance’ was the order of the day throughout the session.

In our experience, this is the general approach taken by HMRC regarding the R&D tax relief scheme – balancing the Governmental and commercial desire to make the UK an innovative powerhouse with the need of HMRC to keep the books balanced and avoid paying out on non-compliant claims.

We understand these needs and work to keep them in mind while achieving the best outcome for accountancy practices and their clients.

From the latest Treasury Committee session, we identify that this balancing act is not going to be an easy fix.

HMRC have clear and valid concerns as to how the scheme is administered, resulting in a “five-fold” increase resources to tackle compliance under the scheme in the last two years.

However, SMEs are also on edge. While the risk to SMEs, in our view, remains relatively low with compliant claims, we see that there needs to be clarification on:

  • How claims are assessed
  • Whether payment should be made pre or post-investigation
  • The expertise level of teams carrying out enquiries

Approaching claims with integrity

As the experts in R&D tax relief claims, we understand that this is a challenging time for your SME clients, with significant changes to the scheme and renewed compliance efforts from HMRC.

While retroactive investigations into R&D tax claims can have a negative impact on SMEs, getting your clients’ claims right can help to tackle this issue.

Clarity is central to this. Your clients’ claims must describe in detail how each activity qualifies for R&D tax relief – and they must do so in good faith without including activity which clearly does not meet requirements.

We can advise you on how to protect your SME clients from an HMRC crackdown by producing consistently compliance and accurate claims which still maximise the amount of relief which your clients can claim.

For support with building your R&D tax service, please contact a member of our consultancy team today.