Software devs targeted as British tax authority makes fraud allegations

R&D tax relief campaign snares companies claiming in good faith

Exclusive Software firms and other companies developing innovative code have been accused of fraud and had tax relief payments stopped as a result of a broad-based campaign executed by the UK tax collector.

HMRC's Fraud Investigation Service has written to software companies saying their claim for R&D tax relief was fraudulent.

"The claim triggered an alert in our systems and has caused HMRC to believe you have fraudulently claimed money to which you are not entitled. Therefore, HMRC has blocked payment of this money to which we believe you are not entitled," the letter, seen by The Register, said.

It then gives the companies 30 days to supply additional information, including technical details of the development or research in question. "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 into any suspected fraud committed against the R&D scheme," it said.

While acknowledging some organizations have set out to defraud the scheme, the letter's recipients include those claiming tax relief to which they are entitled in good faith, tax experts told The Reg. The approach taken by the tax collector could be seen as a heavy-handed, indiscriminate tactic, they argued.

Rowan Morrow-McDade, senior tax manager at chartered accountancy firm Alexander & Co, told The Register: "We've had inquiries from HRMC into R&D tax credits before, saying 'Can you clarify this or provide backing for that?'

"The issue with these new enquiries is that they're all fraud investigations. And we've never seen that before. They effectively accused our clients of fraudulently claiming money. One of them is a large audit client in the software sector, with contracts with government bodies, so to accuse them of fraud is quite egregious. If HMRC wants to ask more questions, that's fine. We're very transparent, but accusing clients of fraud is just something else."

To qualify for tax relief, software development needs to represent a novel approach to solving problems, or an advancement in a field, such as a new database architecture design. Most day-to-day development will not qualify, but the complexity lies in understanding what does.

Meanwhile, the broader field of R&D tax relief has been prone to some suspect claims.

John McCaffery, Alexander & Co tax partner, said: "In our experience, we have seen a lot of very poor claims being made by some advisors. But sometimes, the Revenue takes a sledgehammer to crack a nut.

"It could well be they know there's an issue with poor R&D claims, but they don't filter internally. Maybe they're having a look at a large number of R&D claims and starting on the basis that they believe it's fraudulent to try to flush out issues."

He also said HRMC had set up a special unit to look at R&D tax credits and possibly hired a hundred or so people to staff it.

While some businesses may simply decide they no longer want to claim the tax credit rather than deal with the HMRC process, that was not always an option. If they have already claimed, HRMC might pursue penalties and interest on claims already made. Doing nothing might be an admission of guilt, even if the claimant believed dealing with the process was not worth the time, McCaffery said.

An HMRC spokesperson told The Register: "We introduced extra checks on R&D Tax Credits claims to protect public money after a rise in fraudulent applications. We have written to those with claims identified as high risk requesting more information so we can ensure their claims are legitimate."

Jenny Tragner, director and head of policy at chartered tax advisors ForrestBrown, said many advisors in the industry were becoming aware of the HMRC's tactics.

But the nature of software development could make proving a genuine innovation quite a lengthy process.

"What can be as challenging within the software sector is articulating the development that a company has achieved to HMRC in such a way that they are happy that it has met the guidelines. And some of that is there's a lot of jargon and terminology that non-software people aren't familiar with. HMRC does have its own software specialists within their R&D team, but it can be potentially more complex if HMRC are checking a claim to articulate the decisions that have been made to articulate the validity of the R&D to HMRC," she said.

The cost of proving a case, in terms of internal company time as well as external fees for tax advice, meant some companies would have to make a commercial decision about whether it was worth continuing to claim the tax relief they are entitled to, she said.

"HMRC have identified and stopped some cases of outright fraud, some completely artificial businesses have been seeking to claim R&D relief. There is also some evidence of abuse in the system, of companies making claims for the use of routine software development that, on the face of it, doesn't meet the criteria. You do need a scrutiny process, but equally, you'd want it to be well targeted and efficiently run so that businesses didn't face having to make a commercial decision about whether they could afford to support a legitimate claim or not," Tragner said.

R&D tax credit was first introduced in 2000 and has undergone several modifications since. The UK government is currently consulting a review of the system following changes announced at Autumn Statement 2022.

Victoria Atkins MP, financial secretary to the Treasury, said: "Getting R&D tax relief right and fit for the future sits at the heart of making sure the UK remains a competitive location for cutting edge research – helping new firms grow."

The consultation ends in March. ®