New research released today unveils that UK businesses are taking huge risks when making research and development (R&D) tax credit claims. A staggering 90% of firms questioned in a YouGov poll of 2,004 senior decision makers did not know that the market for R&D tax advice is largely unregulated, meaning anyone can set up and then make highly specialised tax relief claims on behalf of others.
In another sign that businesses are willing to jeopardise their entire tax position by placing themselves in the hands of potentially spurious advisers, over two fifths (43%) of respondents incorrectly thought HMRC was responsible for regulation.
Despite this seemingly ill-informed position, just one in five businesses (20%) claiming R&D tax relief are worried about the risk of an HMRC enquiry – despite the very real threat of one. These can occur at any time, leading to repayment of a credit or other penalties. ForrestBrown, which commissioned the research, predicts that the number of HMRC enquiries into R&D claims will increase substantially next year, meaning companies should be far more concerned than they are. 100 new R&D staff at HMRC means that from 2021, the tax authority will have the resources to review up to 40% of larger claims.
The data, which is included in a report out today called, UK R&D tax relief: businesses sleepwalking towards disaster, also showed that half of respondents (50%) had a high degree of confidence that their claim could withstand the scrutiny of an HMRC enquiry. But rather than good news, this suggests a potentially serious misplaced sense of security.
Many may believe that a track record of receiving credits in previous years protects them. Yet it doesn’t, and HMRC is cracking down following concerns about error and fraud in R&D tax relief claims. Its latest annual report estimated that there may be up to £311m of mistakes or scams included in its figures.
Given the vast majority of businesses have no idea of the risks they’re taking with unregulated and potentially fraudulent consultancies, it’s not surprising that nearly a quarter (24%) of those who had engaged an R&D adviser cited convenience as the most important factor in choosing an R&D tax adviser.
Less than a third (32%) of respondents said that the professional qualifications of their adviser were one of the factors they considered to be important when choosing to work with them. Only 11% deemed this the most important factor. This is staggering given the lengths other tax professionals go to prove their ability to do the job. To become a qualified tax adviser typically requires years of study. To market yourself as an R&D tax credit consultant can take five minutes.
Jenny Tragner CA ATT, ForrestBrown Technical Director & HMRC R&D Consultative Committee member, said, “We’re passionate about the transformative power of R&D tax incentives. They’re a vital way to encourage greater investment in innovation, which ultimately boosts growth and productivity across the entire country.
“Yet their success, combined with a lack of regulation, has led to spurious advisers, fraud and mistakes becoming widespread. Businesses that make claims need to understand that doing so isn’t a risk-free way to get free cash. If done poorly it can lead to an enquiry, paying back funds and jeopardising a firm’s entire tax position. They need to choose their advisers carefully.”
Tatiana Okhotina, Head of Finance, Azimo Limited, has been the subject of an HMRC enquiry. She added, “When we first received a letter from HMRC saying they were conducting a compliance check into our R&D tax credit claims we were initially quite surprised as we’d already made one successful claim. We were also overwhelmed not only by the number but also by the breadth of their questions.”
ForrestBrown believes the experience of Azimo is not an isolated example. “Many firms are taken by surprise, and without the right professional support, enquiries can become burdensome and frustrating,” adds Jenny Tragner. “Our research aims to understand what’s going wrong and then provide useful advice on how to make the right decisions.”