• Businesses should be prepared for a large increase in the number of enquiries into R&D tax relief claims issued by HMRC.
• The SME R&D scheme is now costing £7.7bn in 2020-21 and could rise to £11.9bn by 2026-27.
• HMRC have hired 100+ new R&D Inspectors, with even more resources expected in April 2023.
• If an enquiry into a R&D tax relief claim uncovers errors, penalties could be charged up to 70% of the claim value and more severe or deliberate cases could result in Criminal Investigation and prosecution.
• Unlike accountants, R&D tax relief boutiques have no regulations to abide by. Some boutiques may be submitting claims that are incorrect/over-inflated, putting the claimant companies at risk.
• Accountability for the R&D tax relief claim submitted sits with the company, not their accountant or R&D tax relief advisor.

Darryl Hoy, a former HMRC R&D Tax Relief Inspector, has warned of a major HMRC crackdown in fraudulent or error strewn R&D tax relief claims by UK businesses, particularly by SMEs.

Following the Autumn 2021 Budget, HMRC announced reforms to the scheme to come into play from April 2023, which have been further clarified in the Spring Statement on 23 March 2022. It is considering what more can be done to tackle abuse in the SME scheme. It’s inevitable that this will result in an increase in the number of enquiries issued by HMRC.

“Specialist R&D tax relief teams at HMRC have already been bolstered with an extra 100 inspectors,”

"with further resources expected to be deployed by April 2023. HMRC also have a number of strategies and tools available to them to help them crack down on the perceived fraud and abuse in the SME scheme in particular.”

Recent studies by Cambridge University and the Office of National Statistics have shown that the government’s SME scheme is now costing £7.7bn in 2020-21 and could rise to £11.9bn by 2026-27.

There are concerns that the SME scheme is underperforming. This could be due to the number of exaggerated and fraudulent claims being submitted, which has led HMRC to step up its compliance activity in this area.

“If HMRC find that a claim is wrong, they will look to recover any underpaid tax and will consider penalties of up to 70% of underpaid tax, with interest on top. More severe cases, where this was a deliberate error, can be referred to the Criminal Investigation team at HMRC.

“Accountability for the claim sits with the company that submits the claim, not their accountant or the R&D tax relief boutique/adviser who made the claim on their behalf. Most accountants are subject to Professional Standards and their conduct regulated but many R&D tax relief boutiques have no regulations to abide by.”

Darryl offered businesses who have claimed R&D tax reliefs, or plan to in future, the following advice:

“The important message here is to do your homework on your R&D adviser, ensuring they have the right Professional qualifications, conduct claims to a high standard, and can be held accountable if the claim is wrong.

“Unfortunately, there are many R&D tax relief boutiques who aren’t adequately qualified to prepare accurate claims, or who push the boundaries way beyond what is eligible, because they are focussed on their fees and not the robustness of the claims they prepare. If it sounds too good to be true, it probably is.

“HMRC never issue formal acceptance of a claim and rely on their 12-month enquiry window to check claims if they have the resources. But with more resources being deployed and increased focus on tackling abuse, the number of enquiries or targeted campaigns are likely to increase."

Darryl currently works as the Technical Director of the Radius R&D tax relief team at Shorts Chartered Accountants, based in Sheffield and Chesterfield.