If you take the trouble to wade through HMRC’s annual report and accounts (2019-20), you will find that pages 183-184 cover R&D Tax Credits, and specifically how HMRC are addressing the increase in error and fraud.
Whilst 2020 arguably may have seen an inadvertent ‘relaxing’ of the levels of scrutiny due the immense pressures Covid placed on HMRC, there is little doubt that this will be reversed to a significant extent in 2021.
At MSC R&D, we welcome this news as we are one of the few specialist providers who have continued to invest in the people and processes that ensure that all our claims are optimised and totally compliant.
People make the difference
We only recruit the best technical (3 PhDs in Computer Science) and financial specialists that we can find and have continued to strengthen our team in 2020, with Deborah Chapple, our highly experienced UK Tax Manager, being recently joined by Tom Watson as a R&D Tax Lead Analyst from Deloittes.
On the HMRC compliance front we engage with two ex-HMRC experts to help us on a strategic and tactical level. Gavin Bate (who wrote the CIRD legislation during his time at HMRC and who is still consulting for HMRC on it) helps with our ISO approach, leads our 6 monthly CPD training, and is our go-to resource for advising us on complex cases from the sales stage through to submission and enquiry if needed. He ensures that at all stages we are the right side of the official policy and our clients are getting absolute compliance. We also have another ex-HMRC Senior R&D tax inspector who is our internal Quality Assurance officer, providing compliance checks to our claims prior to submission. Every single client claim is reviewed by him and he ensure rigorous compliance to HMRC eligibility criteria which helps MSC R&D maintain its ISO9001:2015 quality standards.
Maintaining our eye on the quality ball in 2020 - as well passing our interim assessments for both ISO9001:2015 and Investors in People - we have managed to achieve 5-star European Foundation for Quality Management (EFQM) Recognised for Excellence status (R4E) and reach the finals of the British Quality Foundation’s (BQF) UK Excellence Awards (SME category).
HMRC Report extract
As part of its compliance processes, HMRC undertakes case reviews of individual claims under the schemes where they are assessed as at risk. These reviews can result in claims being reduced or rejected by HMRC; or modified or withdrawn by the company making the claim. In establishing an estimate of the level of error and fraud in R&D reliefs, HMRC undertook an analysis of the results of compliance activity it completed in 2018-19 and 2019-20. Based on that analysis, HMRC has estimated that £311 million (3.6%) of R&D relief expenditure recorded in the 2019-20 Resource Accounts contained error or fraud (we would consider this on the low side).
Based on this work, I have concluded that the controls implemented by HMRC are not currently adequate in preventing or detecting material error and fraud in R&D reliefs. HMRC does not yet have a sufficiently developed understanding of the error and fraud risks arising from the schemes, including why the volume and value of claims has increased significantly in recent years - particularly in the small- and medium-sized enterprise scheme. This understanding is fundamental to establishing the adequacy and appropriateness of any related compliance activity.
HMRC’s current estimate of error and fraud in R&D reliefs is based upon a series of judgements about how likely it is that cases of detected error and fraud are likely to occur within the larger population of unreviewed cases. These judgements are limited by the quality and availability of data in respect of cases that have not been subject to review by HMRC. Based on my analysis of HMRC data, reasonable variations in these judgements could have a significant impact on the range of estimated error and fraud. The methodology adopted by the Department also means that the current estimate does not consider causes of error and fraud outside of those detected by existing controls.
The reasonable variation in HMRC’s estimate of error and fraud highlights that the Department does not currently have a sufficient understanding of the claimant population for these reliefs and indicates that significant work is needed to build HMRC’s understanding and risk-based assessment of error and fraud before effective controls can be designed and implemented and a more accurate estimate of error and fraud can be made.
I have, therefore, included in the scope of my qualified opinion on regularity, HMRC’s expenditure on research and development Corporation Tax reliefs. This is because, although the Department’s best estimate of the level of error and fraud is subject to uncertainty, the cumulative evidence suggests that the level of error and fraud is material to that expenditure stream.
Based on HMRC’s own assessment of the increasing risk of abuse of R&D reliefs, the Department has recently taken several steps to modify its compliance approach and activity, including a commitment to recruit an additional 100 full-time equivalent staff to work on R&D reliefs,all of whom are due to be in-post by the end of 2020. It has also established a revised risk screening process to support the review of claims submitted by companies and is working on developing more effective feedback mechanisms between compliance staff and this process to ensure findings from compliance work are reflected in future risk assessments. We also understand that HMRC has accelerated plans to implement a random enquiry programme for these reliefs to support a greater understanding of the risks present in cases not currently reviewed under existing control processes and to support a better-quality estimate of the level of error and fraud present.
All the more reason to think carefully about who you select as your R&D Tax Credit advisor.