Rogue R&D claim repayments could cost SMEs millions, warns tax expert

A leading research & development (R&D) tax expert with UK Top 10 firm Azets, the largest regional accountancy firm and business advisor to SMEs, has issued a warning to businesses using R&D tax relief schemes as a way to boost cash during the Covid-19 recovery, with repayments of rogue claims likely to cost millions of pounds.

In its latest annual report for 2020-21, HMRC reported an implied monetary value of £303m due to R&D error and fraud within the SME Scheme – up from £271m in the previous year.

David Kitson, tax partner at Azets in the North West, believes this is in part down to a small group of ‘rogue’ boutique advisors who inappropriately seek to maximise R&D tax credit claims and actively targeting SMEs hit hardest by the pandemic.

David Kitson is urging businesses to keep investing in R&D but take the appropriate steps to ensure they do not inadvertently or otherwise claim fraudulently, with HMRC widely expected to tighten controls to better combat rogue advisors and fraudulent claims.

David Kitson said: “The government has set itself an ambitious target to raise total investment in R&D to 2.4% of UK GDP by 2027 – but it must do more to protect SMEs from a minority of rogue firms who seek to maximise claims inappropriately in order to increase their fee which is calculated as a percentage of that claim.

This is driven by non-prescriptive R&D rules which are open to interpretation and inappropriate claims by rogue firms targeting cash-strapped businesses. Ultimately, it’s the businesses that will suffer when the government inevitably acts to reduce the growing cost of R&D error and fraud, particularly with new incentives for R&D investment increasing their vulnerability to rogue advisors.”

In September, HMRC reported a significant increase in the total number of R&D claims, revealing a 16% increase in the year ending March 2020. This equates to £7.4bn in total support claimed, up 19% from the previous year (£6.3bn), with further increases from 2023 following the expansion of the R&D tax relief scheme to include cloud computing and data costs, announced during the Autumn Budget 2021.

David Kitson notes the steps businesses can take to ensure they take appropriate advice and take advantage of R&D tax relief schemes in a way that is safe and legal.

  • Be proactive in researching and understanding government guidance on new and existing allowable R&D expenses against your company’s activities or planned activities
  • Review these activities to assess whether you are eligible for R&D tax relief claims – or whether you can invest in R&D in order to stimulate growth
  • Beware of unsolicited approaches from boutique firms specialising in R&D tax claims and ensure you complete rigorous due diligence before taking advice
  • Seek advice from your own accountant and reputable firms with memberships to professional bodies, with reliable references from peers

David Kitson concluded: “We welcome the widening of allowable expenditure in IT, which will considerably help the SME sector in which businesses use cloud-based solutions to enable their IT infrastructure and echoes the modern way of working – but make no mistake the emphasis is on businesses to make sure they are taking the right advice and making legitimate R&D tax relief claims.”