HM Revenue & Customs (HMRC) has been getting tough with those suspected of making fraudulent Research & Development (R&D) tax claims.

The tax authority has been sending thousands of letters to taxpayers probing potential dishonest activity and claims, which has provoked alarm over possible criminal action.

This has been prompted by some rogue consultancy firms encouraging firms to make R&D claims which do not always stand up to scrutiny.

What should businesses do?

As a result of the HMRC move, companies are advised to make sure the business is entitled to the relief and there are no errors in the application.

However, many who have received the letters and their advisers are convinced that there is no fraudulent intent and while there may be the occasional calculation error, the claims themselves are valid.

The letter says that the claims have triggered an alert on the HMRC system which leads them to believe it is a fraudulent claim and blocking the payment. The letter then requests significant amounts of information about the claim.

Fears over being punished for innocent mistakes

While everyone welcomes cracking down on fraud, many accountants believe that in most cases, it is inadvertent errors in applications rather than deliberate fraud and are alarmed at the tone of the letter, as fraud is a criminal offence.

Firms are entitled to claim tax credits if they invest in developing new products, processes or services or enhancing existing ones.

The Government gives tax breaks, or tax credits to firms involved in innovation in the development of new products, services, processes, or enhance existing ones within a business.

Who can claim R&D relief?

Depending on the size of your company and if the project has been subcontracted to you or not, you can claim R&D relief if you’re an SME with:

• Less than 500 staff
• A turnover of under 100 million euros or a balance sheet total of under 86 million euros

SME R&D relief allows companies to:

• Deduct an extra 130 per cent of their qualifying costs from their yearly profit, as well as the normal 100 per cent deduction, to make a total 230 per cent deduction
• Claim a tax credit if the company is loss-making, worth up to 14.5 per cent of the surrenderable loss.

For help and advice on R&D tax credits or other taxation matters, please contact our expert team.