Research & Development (R&D) tax credits are designed to reward companies who undertake research and development activities in various fields. 

They can fuel competitiveness, job creation and overall growth by providing a timely and significant financial boost or reward to companies who invest in innovation by reducing their tax bill or being used to claim a cash refund. 

They can be especially beneficial to SMEs by being able to claim R&D tax credits at a higher rate than larger competitors and can give them an edge as they will usually have limited resources to invest in more speculative research and development.

HMRC have been undertaking a mandatory random enquiry programme on R&D tax credit claims from small and medium sized enterprises from the Covid-affected years of 2020 and 2021.

This gives them a better understanding on the level of non-compliance of R&D tax relief regulations but is also catching more genuine claims as a result along with errors and outright fraud. 

This is based on HMRC’s own assessment of the situation. 

In their latest report they found that fraud and error for the fiscal year 2020/21 was significantly higher than previously thought. They found it represented 24.4% of R&D expenditure claimed for, a rise on the previous estimate of only 5.5% for the same period. 

Furthermore, the mandatory random enquiry programme found that 50% of all claims submitted were non-compliant in some way. 

So even if you and your accountants have been meticulous in applying for R&D credits, directors shouldn’t be surprised if they begin to receive communications from HMRC inquiring about their procedures if they claimed during these periods or continue to. 

To mitigate any possibly negative outcomes from an HMRC inquiry, the company and their accountants should work together to ensure that the following bases are covered and can be evidenced:

  • What information has been used to prepare the claim?
  • How does the business capture it and how up-to-date/accurate is it?
  • What real-time testing and financial controls are in place and is there a corresponding matching audit trail?
  • Is the claim methodology documented and applied consistently, including being fully documented and legally compliant?
  • What personnel prepared the claim and did they have sufficient knowledge/experience/input on technical and tax matters? Also what advice was sought and who/where from?

As R&D expenditure credit and the SME enterprise schemes are covered under Self-Assessment rules, the claimant is responsible for the claim and has to prove if necessary both the quality of assistance and advice received.

Chris Horner, insolvency director with BusinessRescueExpert said: “Even before the latest  round of HMRC investigations, it was important that firms could demonstrate the accuracy of any R&D claims they submitted and could back them up with relevant and accurate evidence. 

“If they failed to do so then not only could they be looking at a longer and more detailed inquiry which will take up resources and lead to a delay in payment but if any errors were detected or even worse – fraud – then they could be liable to penalties in addition to a reduction in benefits received.

“This is why they should take the opportunity to get in touch with us to talk through what options they have to strengthen and protect their business now, not only if HMRC gets in touch with some questions.”

We offer a free initial consultation for any business owner or director who would like to better understand what tools are available to them if they run into some financial turbulence or if they would like to make changes before change is forced on them externally. 

We also have a new Accountants Hub section with information and news specifically for accountants if they feel their clients could do with some impartial professional advice too.