Navigating a Tougher R&D Tax Credits Environment – And What You Can Do To Protect Your Claims

For over two decades, the R&D tax credits scheme has been a cornerstone of the UK's strategy to foster innovation and support companies investing in research and development. The scheme was designed to encourage risk-taking in science and technology, offering substantial financial benefits to offset the costs of innovative work.

However, in recent years the landscape of R&D tax claims has seen some substantial turmoil, as HMRC has put increasingly stricter measures into place in a bid to reduce losses brought about by non-compliant and fraudulent claims.

In theory, HMRC’s drive to weed claims that are inflated or misrepresent claimant’s work to maximise their benefit. is a good thing; There is an endless list of public services that could benefit from the £1billion that’s allegedly being lost every year to non-deserving claimants. However, in practice over the past two years we have seen that this has also had an unintended ‘ripple effect’ whereby numerous examples of HMRC opening enquiries into genuine claims that clearly meet the criteria.

Through dealing with a number of these kinds of enquiries, we have come to the conclusion that HMRC simply don’t have enough experienced inspectors that can properly review each case on its own merits. To offset this, they have been inclined to use broader, less accurate strategies such as introducing blanket caps and restrictions. In recent times they seemed to have turned to even broader strategies such as targeting whole sectors for closer scrutiny.

However, at the root of all of this are firms that are driven by short-term gains and who submit non-compliant claims either through incompetence or through knowingly gaming the system. These firms are jeopardising not only the integrity of the scheme but also its future.

Caught in the Crossfire: The Plight of Compliant Firms

We are now in a situation where compliant firms find themselves caught in the crossfire between HMRC and those attempting to game the system. As HMRC tightens controls, firms that prepare their own claims must navigate an increasingly complex claims process, dedicating more resources to compliance and documentation.

These measures, while arguably necessary to protect the public purse, inadvertently also penalise compliant firms. Moreover, as HMRC seeks to prevent abuse, the overall benefits rates have been reduced, diminishing the scheme's attractiveness and its ability to stimulate genuine innovation.

We have come across many examples of consultancies that have filed claims for work that evidently doesn’t qualify in the hope that it won’t be scrutinised properly. Most notoriously, this even occurred in sectors such as care homes and restaurants who were targeted in a concerted way by a number of advisory firms.

And while many of these claims did initially get paid out, in some cases the monies were not passed on to the claimants. Additionally, recently HMRC have been increasing their efforts to re-review claims retrospectively and many claimants find themselves in the unfortunate position of having to pay the benefit back with interest with additional penalties in some cases.

In many cases those advisory companies have subsequently been wound up, so there is no chance of the claimant companies ever recovering the consultancy fees. In these kinds of cases the fees and repayments to HMRC have often amounted to tens of thousands of pounds.

Here are just two examples of many:

• “ cold called me informing me that they were experts in the R&D claims field. I explained that I didn't think we were eligible for this type of claim.

Long and short of the story, we got our payment from HMRC but unknown to me they paid out without a compliance check, so 3 years later a whopping bill with penalties arrived from HMRC, tried to appeal but with no luck, so now saddled with paying back a huge chunk of money back. BEWARE”.

• “Again, like many others on here. lured me in to a false promise. Pulled for a compliance check by HMRC and turns out nothing I’d done qualified for R&D although insisted it was and suggested it was industry standard. Anyways, here I am repaying the tax, have already taken their cut and we will most likely get a fine from HMRC. Avoid at all costs!”

Innovation Plus has always had a “compliance-first” approach since our foundation in 2009 and this should now become the standard approach in the industry. The reason is very simple: As long as HMRC believes that the scheme is generating significant losses through non-compliance, the government will continue to find new ways to restrict the scheme and create more friction to the claiming process. This will inevitably have a ‘chilling effect’ on the whole scheme and will disincentivise companies from claiming for genuine innovation.

How Claimant Companies Can Protect Themselves

Given these challenges, it's crucial for claimant companies to adopt strategies to protect themselves and ensure their claims are compliant. Here are some suggestions:

• While specialist R&D consultancies are there to help claimants navigate the complexities of the R&D Tax Credits scheme, claimants must still carry out some due diligence to ensure that that they the work they are claiming for is actually eligible. This includes ensuring that the claim is in a field of science or technology, identifying specific projects that “sought to create knowledge or capability” and being able to define the uncertainties those projects sought to resolve. You can find out more information on identifying qualifying activities here: https://www.gov.uk/government/publications/help-to-see-if-your-work-qualifies-as-research-and-development-for-tax-purposes-gfc3/how-to-identify-qualifying-rd-activities-part-4
• Identifying the eligible projects’ “competent professionals” who are qualified to make a determination on whether it meets the criteria. This is important because the solutions in an eligible project should be not “readily deducible by a competent professional”. You can find more information on this here: https://www.gov.uk/government/publications/help-to-see-if-your-work-qualifies-as-research-and-development-for-tax-purposes-gfc3/importance-of-a-competent-professional-part-3
• Ensure that you thoroughly review your claim before it is submitted to HMRC. In fact, if your advisors have not asked you to review the claim before it is submitted, this is a red flag. Do not hesitate to ask for more detail on why a particular aspect of the work included in the claim qualifies or doesn’t qualify for the scheme. Your advisor should be able to answer these questions clearly and without any ambiguity by referencing the actual legislation.
• Documentation and Record-Keeping: Protect yourself by maintain records of your R&D activities, so that if your claim is every challenged, you have contemporaneous evidence to back up your claim. This includes project notes, financial expenditures, and outcomes. This type of documentation will be essential if HMRC queries your claim.
• Seek Expert Advice: Consider working with reputable R&D tax credit advisors who understand the nuances of the scheme and can guide you through the claims process, ensuring full compliance while maximising your entitlement.
• Stay Informed: Keep abreast of changes to the R&D tax credits scheme, including any new guidance issued by HMRC, to ensure your claims remain compliant with the latest regulations.
• Internal Compliance Checks: Regularly review your R&D tax claims process for compliance, potentially even conducting internal audits to identify and correct any issues before submitting claims.

In conclusion, while the R&D tax credits scheme remains a vital tool for fostering UK innovation, the actions of unethical claimants and the ensuing regulatory crackdown are creating challenges for compliant companies. By adopting robust compliance practices and seeking expert advice from the right sources, firms can navigate these complexities, ensuring they continue to benefit from the scheme while contributing to the UK's innovation ecosystem.

If you are concerned about the compliance of your own claims, we are here to help. Contact us for an objective eligibility assessment without any obligation.