Clamp down on fraudulent R&D tax credit claims
The policies aimed at preserving the relief’s credibility
An R&D culture within business is instrumental at increasing productivity and stimulating growth. R&D tax credits are a fantastic support for those companies investing time, money and resources into further developing and improving their products and services. It is no wonder that the R&D tax credit relief is a core part of the government’s support for innovation, a relief that has consistently increased in its generosity since its inception in 2000. It will be a great contributory factor in helping the government hit its target of seeing UK spending on R&D reach 2.4% of GDP by 2027.
The rise in fraudulent claims
The relief has delivered such value to legitimate companies, and as such, it has become a target for unqualifying companies to make fraudulent claims as an attempt to obtain significant amounts of money. HMRC has identified (and prevented) fraudulent attempts totalling around £300 million.
HMRC have identified two different kinds of abuse on the relief:
- Companies that have been set up to claim payable tax credit even though they undertook no R&D activity; and
- Companies that have claimed the relief, despite having no real presence in the UK.
What can be done to prevent this from happening?
HMRC have put plans in place to help deter the abuse of the scheme and in turn preserve the reputation of the relief.
The changes will affect loss making companies claiming through the SME scheme. HMRC have identified this form of relief as a target for fraudsters since the company does not need to be tax paying and it generates a cash payment.
The cap, which will be introduced in April 2020, will be three times the company’s total PAYE and NIC liability for the year of the R&D claim.
How will this deter abuse of the relief?
Companies abusing the system by submitting false information and those where the UK activities amount to little more than claiming the payable credit typically do not employ many people or pay PAYE and NICs. The introduction of this measure will make the activity less appealing, leading to a reduced number of fraudulent claims.
Will this affect my R&D tax credit claim?
The changes will restrict the tax credit available to your company if you have a limited number of employees and instead opt to use subcontractors to complete R&D activity, potentially down to commercial reasons.
In these cases, any losses which cannot be surrendered for a tax credit due to the cap will be carried forward for use against future profits under the normal loss relief rules.
The measures implemented by HMRC are essential for retaining the credibility of the relief. It is a shame that the actions of some have forced the situation. It is important to remember that the majority of companies who do take advantage of the relief do so legitimately.
However much these amendments are needed to combat fraud, there is a growing concern that the impact will be felt heavily amongst the start-up community, a cluster of companies that may rely upon the support of R&D tax credits to grow and in some instances even survive. Many start up companies depend on the use of subcontractors, especially in the early development phases, as they are unable to withstand the burden of a consistent payroll. The company founders may not even draw a salary themselves. This will affect future R&D tax credits claims.
As April 2020 approaches, I would advise companies who may be affected by the changes to speak to a specialist adviser to get further information.
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