by Nigel Holmes, Head of R&D Technical Operations
HMRC has been growing increasingly concerned about abuse of the R&D tax relief scheme and announced plans last year to clamp down on rogue claims.
HMRC’s unease stretches back years. It estimates that £311m has been lost due to fraud and error in the last two years.
The department has been quick to respond, hiring 100 new caseworkers to boost the amount of proactive compliance work it is able to do. They are partly responsible for an increase in tax enquiries focused on R&D tax reliefs.
The extra personnel turned the heat up on those who had made false claims or been badly advised. This led to a lot of scaremongering in some quarters, prompting a number of businesses to wrongly abandon legitimate claims, even with credible accountants and specialist firms.
This is how abuse of the scheme has undermined confidence in the R&D tax relief scheme as a valuable benefit, and the good work of tax advisers of all kinds.
HMRC’s clampdown can, therefore, only be a good thing, and the department has now revealed exactly how it plans to do this in its Tax Administration and Maintenance Day report.
Its changes represent a minor revolution in working practices which have been in place ever since the scheme came into being in 2000.
These are the steps HMRC will take, from April 2023, to increase compliance:
These proposals follow a consultation on the future of R&D tax relief published in March 2021 and it’s likely further changes will occur in due course. Companies and advisers have until 8 February 2022 to respond to these plans, alongside other changes disclosed in the report.
HMRC is clearly taking a far more strident approach to compliance — it will be allocating even more resources to tackle non-compliance and abuse — but this effort actually began in early 2021.
A rise in fraudulent claims was partly behind the reinstatement of the PAYE cap in April 2021.
Non-compliance appeared to have grown considerably after a previous version of the cap was scrapped in 2012. At the time, HMRC was responding to concerns it disproportionately hurt smaller, younger businesses. However, in subsequent years, HMRC investigators discovered numerous examples of claimants gaming the system and the department was forced to look at it again.
The PAYE cap limits payable credits based on the amount a company pays in tax and NIC deductions. The full impact of this will only become clear once claims for accounting periods ending on or after 31 March 2022 are prepared.
Its reintroduction was just the first salvo in a battle to roll back abuses which, due to the complex nature of qualifying activities, can sometimes be hard to spot.
The PAYE cap will undoubtedly play a role in ensuring compliance, but HMRC’s latest measures will complete the work of creating a hostile environment for abusive claims and fraudulent tax advisers.
This article first appeared in Taxation.
Nigel Holmes is head of R&D Technical Operations at specialist tax consultancy Catax. He can be contacted at Nigel.Holmes@catax.com.