HMRC’s ‘aggressive’ stance on tax fraud risks stifling innovation

The UK tax authority’s “aggressive” and scattergun approach to curbing fraud in a tax credit scheme risks stifling a policy aimed at boosting software and manufacturing innovation among businesses, advisers have warned.

The research and development tax relief scheme enables small companies to claim between one-quarter and one-third of their spending on specific projects.

A rise in fraudulent claims has seen HM Revenue & Customs this year issue more than 1,000 letters in response to claims flagged by its system as “high risk”.

But according to specialists, the increase in bad actors seeking to exploit the tax credit scheme has led to a poorly targeted crackdown by HMRC and long delays in the payment of legitimate tax credits, hitting cash flow.

Craig Mackinlay, a Tory MP and member of the House of Commons public accounts committee, said he has had to “assist within my constituency casework to cut through excessive HMRC delays”.

“The aggressive language often used in HMRC letters is unhelpful in fostering good long-term relationships between businesses and the tax authorities,” added Mackinlay, who is a chartered tax adviser.

Jenny Tragner, director at tax consultancy ForrestBrown, said that while the agency’s efforts to crack down on illicit claims were welcome, a “really hardline approach . . . that isn’t well targeted . . . is probably only going to achieve scaring lots of businesses off”.

James Greary, head of corporate tax at accountancy firm Randall and Payne, described HMRC’s “scattergun approach” as “probably the wrong approach” to tackling fraud.

According to official estimates, R&D tax relief fraud was expected to cost the Treasury £469mn in the last financial year.

Two letters sent by HMRC, which have been seen by the Financial Times, had the same template wording, saying: “The claim triggered an alert on our system and has caused HMRC to believe you have fraudulently claimed money to which you are not entitled.”

In response to a reply from one small business to the first letter, also seen by the FT, HMRC said “no accusation has been made” and described the letter as “a routine standard letter triggered by our systems asking you to provide supporting documents against your claim”. 

Stephen Harvey KC, specialist criminal law barrister at 3PB Chambers, said “what the first letter says, and what the second letter says it means, is not what a responsible body should do”. 

In response, HMRC said it had received more than 8,000 claims under the scheme since April this year.

It added that a rise in fraudulent claims had led it to “implement additional checks”, and that “we have written to individuals whose claims have been identified as high risk, to request more information and determine the validity of their claim”.

Daryn Park, senior policy adviser at the trade group the Federation of Small Businesses, said it was likely some companies had made “genuine mistake[s]” in filing claims, adding that “late payments inhibit [small companies’] cash flow and have a massive effect”.

HMRC last month said it was extending its 28-day payment turnround for claims, adding that it was “working to recover from the recent pause in payments and expect to be processing 80 per cent of claims within 40 days by the end of August 2022”.