The UK has long been at the forefront of research and development (R&D) and innovation, with the UK government offering R&D tax credits to businesses that are investing in innovation, research, or development. The government encourages businesses to take advantage of these tax credits as a way of stimulating research and development and ultimately improving the UK economy. The scheme has become increasingly popular, with HMRC receiving year-on-year increases in the number of claims.

The tax credits are designed to encourage businesses to invest in innovation and grow their businesses. The amount of credit available depends on the amount of R&D activity that a company has undertaken and the amount of money they have spent on qualifying activities.

HM Revenue & Customs (HMRC) are now taking further steps to ensure that R&D tax credit claims are genuine and compliant. The increased scrutiny of R&D tax credit claims has led to an increase in enquiries and disputes with claimants. This article will discuss the increased HMRC scrutiny of R&D tax credit claims and the difficulties faced by claimants and R&D tax credit agencies in responding to these enquiries.

HMRC Scrutiny of R&D Tax Credit Claims

In recent years, HMRC has been undertaking more investigations into R&D claims. As the demand for R&D tax credits has grown, so too has the potential for fraudulent claims. HMRC is now taking a more proactive approach to ensure that each claim is legitimate and that the appropriate tax relief is being granted.

HMRC enquiries into R&D tax credit claims tend to focus on the type of activities a business is undertaking, the level of investment made, and whether or not a company has received any external funding. During the investigation, HMRC also looks to verify any supporting documentation provided and will typically ask businesses to provide further evidence, such as financial records or details of staff involved in the project.

It is important to note that an HMRC enquiry does not necessarily mean that a business has made a fraudulent claim. It simply means that HMRC has some questions and needs additional information to make a decision.

Businesses that are faced with an HMRC enquiry or compliance check are advised to cooperate with HMRC, provide all required information, and ensure that their R&D claims are as accurate and complete as possible. It is also important to seek professional advice, such as from a specialist advisor like Grantica, to ensure that all legal obligations are being met.

It is important, therefore, that businesses ensure that they have all the necessary information to support their claims and that they seek professional advice if they face an HMRC enquiry.

Difficulties Faced by R&D Tax Credit Agencies

R&D tax credit agencies are responsible for helping companies make legitimate claims in compliance with HMRC regulations. Any good agency extends that responsibility to include supporting on any resulting enquiries or compliance checks. The increased HMRC scrutiny of R&D tax credit claims, however, has meant that these agencies now face a number of challenges, including:

• Increased workloads due to the need to deal with HMRC enquiries and provide detailed evidence supporting the R&D claim.

• Difficulty in obtaining sufficient evidence to support claims due to legacy management systems that are no longer suitable.

• Increased risk of penalties and sanctions for companies that do not comply with HMRC regulations.

• Decreased leniency with marketing R&D claim services in compliance with Financial Promotion regulations.

HMRC are also cracking down on claims that it believes are too generous. This has been a major source of concern in the R&D tax credit industry, as businesses struggle to navigate the stricter guidelines.

Businesses are now being challenged for claims that had previously been accepted, which has become a problem for many agencies as documentation is lost in legacy systems, with many firms purportedly using messenger services like Whatsapp to host supporting documentation.

The challenge is further compounded by the fact that the HMRC’s guidelines are not always clear, and the process for determining what is and isn’t eligible for tax relief is often complex.

To complicate matters further, HMRC has also implemented a new system which seeks to ensure that the most accurate claims are made. The system, called the Tax Credit Automated Compliance System (ACS), is designed to assess the validity of submitted claims, and to identify any inconsistencies in the claims made. This, in turn, has made it more difficult for businesses to make successful claims, as they need to make sure that their claims are accurate and complete.

The difficulty of making successful claims is further compounded by the fact that R&D tax credit agencies are now facing an increase in rejected claims, as HMRC’s crackdown on generous claims continues. This means that businesses must now be extra cautious when it comes to the claims they make, as they could be liable for fines and penalties if they miss any required details or make any inaccurate statements.

Platforms for processing easy claims do exist. However, they are now seen as ‘risky’ options as the possibility of inaccurate claims increases and there is a lack of flexible methodology. The predefined methodology used by these platforms puts businesses at risk when it comes to R&D claims in 2023, and the lack of human touch often means that such claims may be flagged as fraudulent. 

Solutions for R&D Tax Credit Agencies

As they look to maintain their high success rates for R&D claims, most agencies are now looking for effective solutions...

One definitive solution is to improve the systems and processes in place that help these agencies process R&D tax credit claims on behalf of their clients.

Legacy systems can be replaced with tailored software solutions that allow for detailed tracking and management of the entire claims cycle, from client onboarding and information gathering to claim preparation and submission. MVP Solutions is building a holistic R&D claims management platform for leading R&D tax credit agency Grantica, with features like claim breakdowns, claim summaries, document hosting, client collaboration, and revenue management. It will create a considerably smoother process for agencies and businesses alike to not only prepare and submit R&D claims, but also to support any HMRC enquiries or compliance checks.

By increasing reporting capability, turning client onboarding and collaboration into a seamless experience, and creating a streamlined but fully tracked end-to-end claims process, we are confident that the R&D claims management platform will arm Grantica with the necessary tools to continue processing successful R&D claims for their clients and support them through any HMRC enquiries.