R&D Tax Chaos: Calls for Stricter Advisor Regulations Amid Rising Fraud

As the UK government overhauls the tax credit system for Research & Development (R&D), experts insist on stringent regulation for advisors guiding companies through their R&D tax claims, an article in Accountancy Today suggests. This push comes amidst revelations of escalating fraudulent claims, compelling HMRC to redefine its strategy and tighten the reins on claim submissions.

HMRC’s Battle Against R&D Tax Fraud

HMRC (Her Majesty’s Revenue and Customs) is taking decisive steps to curb abuse within the R&D tax credit system, citing a staggering rise in fraudulent claims. Recent findings indicate that nearly one in six claims might be deceitful, a reality that has jolted the authorities into action.

The outcry for reform isn’t just about adjusting the numbers; it involves a complete overhaul of the system. Justine Dignam, from Markel Tax, underscores the urgency for stricter regulations on professional advisors involved in R&D applications. She’s pushing for a system that can weed out the architects of these deceptive claims, ensuring that companies receive legitimate guidance.

Voices of Caution Amid Reform

While there’s a consensus on the need for change, how it should be implemented is up for debate. The Chartered Institute of Taxation (CIOT) has voiced concerns, deeming the current proposals “over ambitious.” They fear these rapid changes could inadvertently hamper the very innovation and growth R&D investments are meant to foster.

Come April 2024, we could see a merged, single scheme for R&D, accentuated by additional tax relief for SMEs (Small and Medium-sized Enterprises). However, David O’Keeffe of the CIOT urges the government to consider a more measured approach to these reforms. He warns that the brisk pace might lead to practical difficulties for both HMRC and taxpayers, resulting in unintended drawbacks.

Dissecting the Scale of Fraud

The real eye-opener was HMRC’s annual report, disclosing a startling surge in erroneous claims and outright fraud within R&D tax relief. The 2020-21 losses were estimated at a whopping £1.13 billion, accounting for 16.7% of claims. This figure dwarfs the previous estimate of £336 million, representing 3.6% of total claims.

Dignam emphasizes that before any new systems are introduced, the rampant fraud must first be addressed. She’s critical of the HMRC’s current approach, which despite an increase in compliance checks and about 300 inspectors on the ground, still hemorrhages over £1 billion in fraudulent R&D claims.

Stuart Brodie of Markel Tax shares similar sentiments, labeling the leap in supposed fraud from 3.6% to 16.7% as a massive admission on HMRC’s part. This trend highlights why the department is intensifying its scrutiny of claims.

The Perilous Path for Claimants

With HMRC’s intensified investigations, companies face heightened risks, especially if they’ve been misguided into filing dubious claims. According to Dignam, this predicament not only jeopardizes their standing if probed but also burdens genuine claimants who’ll now have to endure rigorous checks. This atmosphere of distrust may even discourage rightful claims in the future.

A Clarion Call for Advisor Regulation

At the heart of this maelstrom is the regulation of advisors, seen as a pivotal move in eradicating fraudulent R&D claims. Dignam advocates for the registration and regulation of R&D consultants to enforce a standard of proficiency and expertise. This step, she believes, is a rational measure in confronting one of the primary sources of fraudulent claims.