R&D claims: A fusillade of fraud accusations – Andrew Park
Tax Investigations Partner, Andrew Park, discusses recent criticism of HMRC for its aggressive stance in combating tax fraud related to the research and development tax relief scheme, in Accounting Web.
“We are contacting you with reference to a recent claim made for relief . . . We continuously monitor systems and customer records to guard against fraudulent activity. The claim triggered an alert on our systems and has caused HMRC to believe that you have fraudulently claimed money to which you are not entitled.
If you think you are entitled to this money, then you need to contact HMRC as a matter of urgency so that we can re-examine your claim. If we do not hear from you, we will cancel the repayment claim.”
So begins a recent “one to many” letter sent by HMRC Fraud Investigations Service to claimants for Research and Development tax credits.
The letter is seemingly unprecedented in being issued as an out-of-the-blue computer-generated fraud accusation by the HMRC Fraud Investigation Service but within the context not of an investigation into underpaid tax – or indeed, of a civil or criminal investigation of anything – but the refusal of a claim for a tax credit unless further compelling information can be provided.
Regarding the possibility of future criminal investigation, the letter states:
“At this time HMRC has not opened a criminal investigation into this suspected fraud. However, you should be aware that HMRC reserves the right to open a criminal investigation . . . any investigation could use as evidence anything you have said to HMRC about your claim . . . should you decide to contact HMRC . . .”
The way the letter is framed suggests that HMRC is presenting claimants with a choice – accept rejection of the claim and walk away or risk possible criminal investigation.
Taking a step back, HMRC has got itself into a bit of a pickle with R&D claims because the numbers have surged in recent years as the Government has offered generous credits in its bid to take R&D to 2.4% of GDP whilst HMRC resourcing has failed to keep pace and unscrupulous “advisers” – seldom professionally regulated – have entered the market cold contacting firms and offering to work miracles in return for quantum based commissions. HMRC is faced with a processing backlog – now exacerbated by putting extra checks in place to detect and combat equally embarrassing levels of fraud – which its latest annual report estimates at c. £0.5bn across the various tax credit relief schemes.
Such are the constraints on HMRC’s resources that it now no longer even pretends to investigate all suspected fraud – it was candid about that, for instance, in a statement on dealing with Covid support scheme fraud. Instead HMRC has become ever more reliant on behavioural science techniques and “one to many” letters to trawl through data and nudge – either through frightening people into self-disclosure, educating them to get things right in the first place or, seemingly in this new evolution, to stop wasting its time and drop queue clogging claims it doesn’t like . . .
Clearly, when HMRC refuses an unwarranted claim, it prevents a loss of tax before it can happen – so it would be easy to assume that short of a particularly expensive use of resources pursuing a criminal punishment there is little else HMRC could do to punish a wayward taxpayer. However, that would overlook that HMRC’s civil tax-geared penalty regime is based not on actual underpaid taxes per se but on Potential Lost Revenue – which includes losses which deliberate wrongdoing or careless errors could have brought about.
What is not clear is how many claimants HMRC plans to investigate civilly for making fraudulent or careless claims in order to raise penalty determinations – but judging by the volume of these latest “one to many” letters, the answer is not many. The letters don’t appear to preclude HMRC from doing so but by their very design one can infer that HMRC has concluded that it simply can’t spare its investigators to do it and is happy to settle for heading off unjustified claims at the pass and shortening its queues. That may be expedient in the short-term but hardly seems to be in the long-term public interest.
On the other hand, imagine making a claim in good faith and then finding one’s business – and by extension oneself – on the receiving end of such a letter with such a blunt accusation of criminality. Perhaps having enthusiastically diverted precious funds to R&D expenditure as a direct response to tax incentives offered by the Government. Perhaps relying too on prompt processing of the claim to keep up cashflow. HMRC’s “one to many” letters have a track record of going not just to intended recipients with genuine compliance issues but also – because of false anomalies thrown up HMRC’s computer systems – to responsible and well-advised taxpayers with no case to answer. Having experienced such heavy-handed tactics those sorts of taxpayers will think long and hard before ploughing excess money into R&D again.