Research and Development Tax Credits are intended to drive high-tech innovation. Introduced in 2000, they offer businesses financial incentives to work on innovative science and technology projects.
There has been widespread abuse of the scheme. In the year to March 2020, £7.4 billion of support was claimed via 85,900 claims, an increase of 16% from the previous year. Recent HMRC reports state that losses to fraudsters and erroneous claims reached £469 million in 2021 – and experts say that may be an underestimate of the true losses. While some of this fraud is opportunistic, HMRC says it has found some links to organised crime. A major Times investigation found that companies have claimed tax breaks for "innovations" such as adding new vegan options to a pub menu or installing bike sheds.
At a meeting of the Lords Finance Bill Sub-Committee at the end of October, focussing on the reforms to Research and Development in the draft Finance Bill, HMRC's failure to prevent the abuse of the scheme was condemned in the House of Lords as a "major financial scandal". Lord Turnbull, a crossbench peer, and former Cabinet Secretary commented that a large number of claims made under the scheme are "bogus" and that "something needs to be done".
Accountants and tax advisers have been criticised for pushing the boundaries of the scheme. A simple online search for 'Research and Development Tax Credits' reveals hundreds if not thousands of advisers offering to help clients make claims under the scheme. Media reports state that HMRC has found some advisers were presenting the credits to clients as "free cash from HMRC" or asserting that "HMRC never checks" the veracity of the claims. The Chairman of the Finance Bill Sub-Committee commented that agents and advisers have "fuelled a huge rise in claims". The Charted Institute of Taxation and the Institute of Chartered Accountants Scotland have also raised concerns about the involvement of their members in claims made under the scheme.
HMRC announced reforms of the scheme in the Autumn of 2021 in order to crack down on abuse of the research and development incentives. Initially slated to come into force in April 2023, many of the reforms have been accelerated, and additional measures have also been implemented by HMRC to curb the use of the scheme. HMRC has established a 'threat risk assessment process' for all R&D claims, and additional identification and verification controls have been implemented. The creation of a Research and Development Anti-Abuse Unit has been accelerated. HMRC is also now cracking down on historic wrongful or fraudulent claims. There have been a number of recent arrests and it is likely that we will see recovery action by HMRC on a significant scale.
Whilst there is no suggestion by HMRC that advisers have defrauded or misled HMRC, advisers will no doubt be in the firing line as clients seek to recover interest and penalties charged by HMRC, or make claims alleging that they could have structured their businesses more tax-efficiently had they known they did not in fact qualify for tax credits. Allegations of tax advice are the most common cause of claims against accountants, and the HMRC crackdown may well result in another round of tax scheme related claims.
When considering the merits of claims made against tax accountants, one useful resource is the Professional Conduct In Relation to Taxation (PCRT) publication. This is published by 7 leading accountancy and tax bodies and sets a standard for professional behaviour. Failure to follow the PCRT edition in force at the relevant time may expose a member of one of the bodies to disciplinary action and may bolster a claimant's civil claim. Of particular relevance to R&D tax advice work is the 1 June 2020 PCRT help sheet: 'Topical guidance covering the application of professional standards to the provision of R&D tax credit services.'