Markel Tax, a leading tax services and insurance provider is today warning UK accountants and their clients that the surge in HMRC Research and Development (R&D) tax credit claims investigations, combined with stricter submission rules, is putting them at significant risk.
Markel Tax predicts* that by the end of 2023, investigations into R&D claims will have risen by a staggering 900% from levels seen in 2019. Markel Tax is currently seeing approximately one in 25 R&D submissions being targeted by HMRC, a dramatic upturn based on previous activity. HMRC is increasingly targeting R&D claims in their efforts to eliminate erroneous submissions filed by unscrupulous advisers seeking to take advantage of the system at a cost of £469m to the UK taxpayer in 2021/22.
Accountants must take action now to protect themselves and their clients against the potential consequences of submissions likely to fail HMRC scrutiny.
HMRC now have 245 dedicated R&D inspectors, many recruited in the last 12-18 months, to scrutinise R&D claims and have already issued thousands of letters to claimants about their submissions. This increased focus is a means to claw back revenue when the Government is looking to boost receipts as the country enters a tough economic period.
“R&D tax relief is an unregulated market. There has been an explosion in providers misleading SMEs about what qualifies as R&D and failing to ensure that submissions sufficiently document a company’s eligibility to claim. We have seen instances of claims being prepared for restaurants simply developing a new recipe and for care homes for producing medication plans – things that any credible and professional provider would immediately reject,” said Justine Dignam, Director of Tax Incentives and Reliefs at Markel Tax.
Legislative changes on April 1 2023 have increased risk for both the end client and their accountant. It’s crucial that accountants take action now to de-risk claims.
With further legislative changes coming in August, submissions must evidence the intricacies of the research and development at play, the baseline of technology, how it is being implemented, and to what degree it qualifies as a significant scientific or technological advancement. Should HMRC reject a claim they have the power to investigate any previous claims by that company. Not only will the company face repayment of any owed tax but they may also receive a penalty. This will have a significant impact on cashflow for many businesses falling foul of an investigation.
In addition, each claim will need sign-off from a designated officer of the claimant company placing them under the microscope should a claim be subject to enquiry. Should they recommend third-party advisers that subsequently fail to defend a client in the event of an HMRC investigation, the accountant will expose their client to additional risk.
“Accountants must act now to protect themselves and their clients against the risk of an HMRC investigation,” continued Justine. “We are seeing a sharp increase in the number of accountants contacting us looking to support clients as the legislative changes approach. If clients have made a claim in the last five years that their accountant suspects might not stack up to HMRC scrutiny now is the time to engage expert and reputable support. This is especially the case where the accountant suspects the original R&D adviser will not defend the client in the event of an HMRC investigation and they are looking to work with providers that guarantee this support.
The changes also pose a unique opportunity for proactive accountants. Whilst almost every accountant can expertly prepare a financial report, those that can also offer robust and compliant advisory services on issues such as R&D claims will have a competitive edge. With expert support on hand, accountants can review their client base to uncover tax relief opportunities before the client is approached elsewhere, enabling them to capture new revenue opportunities and retain clients.”
To protect themselves and their clients, accountants should act now to ensure that R&D claims are undisputable and maximised. Failure to do so could result in unnecessary risk and exposure to financial loss.
*Predictions using a combination of Markel’s own fee protection insurance data and HMRC statistics.