Small construction firms have been told to exercise caution when applying for research and development (R&D) tax relief as HM Revenue and Customs cracks down on non-compliant applications.
Almost two-thirds of research and development (R&D) tax relief claims from SME construction firms are not met, according to HMRC, but tax experts have raised concerns about the body’s alleged over-policing.
New data released by HMRC shows that 7,600 small construction businesses claimed R&D tax credits worth £260m in 2020 and 2021, of which HMRC said only 38% had fully compliant claims.
The tax agency said it was now looking to clamp down on non-compliant tax claims, saying just under a fifth (18%) of SME builders’ claims were not fully compliant, while almost half (44%) were only partially compliant.
In a statement, it said it was introducing a series of new measures to deal with non-compliant tax relief claims, adding: “Concern about the abuse and overreaching of tax breaks involving tax breaks has grown in recent years.”
In the last three years, HMRC has more than doubled the number of people working in R&D compliance, with 300 more staff. In July 2022, it also created an anti-abuse unit, specifically to deal with incorrect claims and to open inquiries in the most complex cases.
HMRC said it had blocked £85m of fraudulent claims across all industries and challenged more than 2,500 suspected fraudulent claims. Their investigations have led to the arrest of nine people.
But earlier this month, the Chartered Institute of Taxation (CIOT) wrote to HMRC saying “the latter’s efforts to crack down on the abuse of R&D tax relief are resulting in them rejecting legitimate claims and locking out other genuine claimants with a bureaucratic system that encourages them to give up their claims”.
The CIOT said HMRC’s “volume compliance approach” was based on “frequent challenge and standardized letters with little or no opportunity for companies and their advisers to explain the R&D activity they engage in”.
He added: “While historically conversations were an important mechanism through which R&D could be explained to HMRC, under the new approach there is no direct engagement between the compliance team and the claimant, either in person or virtually.”
Thomas Boaden, senior business development director at business performance specialist Ayming, said Construction news: “From a recent report published by HMRC, alarming figures have come to light about fraud and error in the R&D tax relief claimed by SMEs in the construction sector in 2020/21.
“However, these figures and the process by which they were calculated have raised eyebrows among tax professionals. In a letter to HMRC published on 3 July, the CIOT highlighted many problems with HMRC’s current approach to volume compliance, which calls into question the validity of its findings.
“The CIOT letter mentions its “strong disagreement with HMRC’s view on enforcement” in relation to outsourcing, which is particularly prevalent for SME subcontractors, a view I agree with.
“In any case, it’s safe to assume that HMRC will use this new data to justify the increased number of open inquiries for construction industry R&D tax claims, which is obviously bad news for the industry.”
Steven Levine, tax partner at an accounting firm BDO agreed, saying: “Given that the estimated level of compliance among construction firms is relatively low compared to firms in other sectors, it is likely that construction firms’ R&D tax relief claims will continue to come under close scrutiny by HMRC.
“While there will undoubtedly be more red tape for businesses claiming R&D relief in the future, HMRC’s own figures suggest that this will remain generous relief worth around £9.5 billion in 2027/28.
“However, in many cases, companies will need to plan their R&D tax claims more carefully and put new processes in place to collect the right information, for the first time, to support their R&D claims. Companies facing an investigation into their R&D claims are also advised to seek specialist advice on dealing with R&D investigations.”
Ayming Senior Director Joana Palha added: “HMRC’s new ‘guilty until proven innocent’ philosophy will make it imperative that construction firms exercise due diligence and ensure they engage reputable advisers when preparing their claims.
“This is doubly important now that there is a requirement to notify HMRC which agent you are using. These advisers play a vital role in navigating the complexities of the new R&D tax claim process and can ensure that businesses set out compliant and accurate returns.
“When selecting an advisor, companies should prioritize those with a proven track record and a strong industry reputation. Conducting thorough due diligence, seeking recommendations and reviewing the advisor’s credentials can help ensure that they have the experience and credibility to handle the complexities of R&D tax claims effectively.”
HMRC said some new policy measures to tackle non-compliance were already in place, while others come into effect next month.
The measures include requiring all claims to be made digitally, reducing the amount of relief payable, requiring each claim to be supported by a designated company officer and requiring details of an agent associated with a claim.
