R&D tax credits are a form of corporation tax relief designed to assist companies with their research and development aims, providing, in many instances, vital finance to further projects and support future business plans. The benefits of the relief can be significant, with the average claim for a UK SME currently standing at £54,000.
Unfortunately, the lure of these vast sums of cash has encouraged unscrupulous companies to take advantage of the relief, either by viewing it purely as a money-spinning exercise or an opportunity to defraud the system.
Two key areas in which the relief can be at risk of manipulation are:
- Companies falsely claiming that they are undertaking R&D activities; and
- Advisers wrongly over promising and producing incorrect reports, putting the claimant business at serious risk of repercussion
What is being done?
A two-pronged approach has been putting place to combat fraudulent use of the R&D tax credit system.
Raising professional standards in the R&D tax credit industry
The Professional Conduct in Relation to Taxation (PCRT) sets out the principles and standards of behaviour that all members must follow in their tax work.
The guidance has recently been updated to cover the application of professional standards to the provision of R&D tax credit services, stating that an R&D tax adviser should be meeting regulatory obligations, which include anti-money laundering (AML) and GDPR compliance.
The guidance also stipulates that R&D tax credits are recognised as a specialist service and that the adviser should be competent to provide that service, at all times performing their duties with the upmost professionalism.
Penalties can be imposed on claimant companies by HMRC for wrongly prepared submissions. As a claimant company, you need to ensure that you have full confidence and trust in your chosen adviser in terms of their qualifications, experience and reputation.
Competent advisers will have the necessary professional qualifications and experience to guide you correctly. At LimestoneGrey, we are a firm of Chartered Tax Advisers, a qualification which is seen as the gold standard here in the UK. You should never be tempted to use an unqualified adviser, as it is unlikely they will have a complete and full understanding of the tax legislation and how it should be applied in each situation.
We would always advise you to do your research into the adviser and their company before taking the step to form a working relationship and of course use your instincts. One alarm bell moment that should cause you some concern, for example, is an adviser informing you of the size of your claim during an initial consultation. Without completing a detailed review of your financial information and projects, this is an impossible task.
Clamp down on fraudulent R&D tax credit 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 put plans in place to help deter the abuse of the scheme and in turn preserve the reputation of the relief.
The proposed changes will affect loss making companies claiming through the SME scheme. HMRC have identified this category as a target for fraudsters, since the claimant company does not need to be tax paying and is able to access a significant a cash payment from HMRC.
A cap has been suggested, which will be three times the company’s total PAYE and NIC liability for the year of the R&D claim. Should your payable tax credit be in excess of this figure, the cash payment will be restricted.
Despite its good intention, the proposed change has been met with some negative feedback. Many fear that smaller genuine SMEs, particularly starts ups who are more susceptible to making use of subcontracted expertise rather than increasing their staff numbers, will suffer.
It has been reported that HMRC propose to excuse claims below £20,000 from the cap, in a bid to particularly help start-up ventures. However, as highlighted by the ICAEW, it then remains unclear how this measure will prevent larger volumes of lower value fraudulent claims.
The cap was due to be introduced in April 2020 but has since been delayed until April 2021 to allow for further consultation.
If you feel that your company could be adversely affected by the PAYE cap, speak to one of our advisers who will be able to guide you on the impact to your claim and what options are available to you.
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