Why research tax credits are triggering nuisance phone calls and serious fraud
A new menace has joined ‘Have you been in an accident?’ and PPI messages in the plague of phone scams: R&D tax credit cold calls.
Those in research report being increasingly pestered by people who want to “help” them, sometimes in dubious ways, in claiming money from the government via R&D tax credits—an area the government says is riven with fraud.
And these people do not take no for an answer. “One consultant who contacted me during lockdown via LinkedIn even offered to put my children on a complimentary one-hour zoom tuition course so I could take a call from them,” says Melissa Strange, chief financial officer at the healthcare technology firm Closed Loop Medicine. “It was really bizarre.”
Strange says self-styled R&D tax consultants now contact her two or three times a month to offer their advice on how to cash in on the government’s tax break scheme. “What I find really frustrating is they come to me, a qualified accountant who has been working in life sciences for many years, assuming they’ll know more about what R&D tax credits are [than I do],” she says.
“But I can see that if they go to smaller companies, where they don’t have an in-house finance person, they could [easily] take advantage.”
Add in the nefarious tactics these consultants use to try to win customers, and it is easy to see how companies could be persuaded to make claims that may be slightly dubious.
Annoying though these tactics may be, there is a good reason for cold callers to chance their arms. R&D tax credits are big business—and the consultants know it. First introduced in the UK in 2000 to encourage firms to spend more on research and development, the scheme works by reducing a company’s liability to corporation tax, or through making a direct payment to a company.
It is a popular scheme. Businesses claimed a record £7.4 billion in tax relief in the year ending March 2020, around 14 times the annual value of grants for R&D handed out by Innovate UK.
Many businesses feel the tax credits are crucial in helping firms spend money on R&D in the UK. “We are in a globally competitive environment, and one of the things companies look at when deciding where to base their R&D activity is the tax environment,” says Martin Turner, head of policy at the BioIndustry Association. “So, R&D tax credits are incredibly important for attracting and maintaining companies in the UK.”
That importance means that, as their popularity has grown, R&D tax credits have become a major target for fraud.
‘Abuse and boundary-pushing’
In November 2021, the government’s revenue and customs arm set out its frustration over the “abuse and boundary-pushing” happening in the R&D tax credits scheme, costing an estimated £336 million in 2020-21.
“These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit numerous dubious claims,” HM Revenue and Customs wrote. “The commission basis can lead companies to view a claim as cost-free, and some are willing to accept questionable claims.”
Consultants who cold call small- and medium-sized enterprises (SMEs) offering spurious advice on R&D tax credits have increasingly become a headache for HMRC, which estimates that fraud and error accounts for around 3.6 per cent of the estimated cost of R&D tax credits.
Research Professional News has found several cases of businesses being put under extraordinary pressure by these advisers.
Cold-calling nightmare
Colin Hailey, chair of the BioIndustry Association’s Finance and Tax Advisory Committee and a partner at tax advisory firm Confluence Tax, says his own clients are cold called “all the time” by other consultants offering no-win no-fee services—with some charging as much as 30 per cent of any successful claim. “They have teams that literally cold call companies every day. Once the claims go in, they hound the revenue [HMRC] to find out if the claim has been paid—because they don’t get paid unless the cash comes in,” he says.
Hailey claims that some consultancy firms are encouraging people to claim for activity that would not normally be classed as R&D—such as redesigning a website. “That doesn’t count because in doing up that website, you’re using standard software tools. That’s not R&D,” he says.
“Clearly, if you’re an advisory firm on a contingency-fee basis, you set the bar very low because you just want the fees—and you’re abusing the fact that [some] companies don’t know any different.”
There are many legitimate firms that help researchers with their accounts, but some of the tactics of aggressive touts for credits cross the line into illegality.
Hailey has come across consultants offering to create bogus invoices to help companies “get started” on the HMRC system. “It’s basically fraud. I’ve had companies ring me up and suggest we do that with our clients. You can imagine what I told them.”
He also knows of consultants who provide HMRC with their own financial details instead of those of the company making the claim, and they then “collect their fee directly” from HMRC before paying the rest of the money back to the company.
‘Special relationship’
Another common tactic, according to Hailey, is for consultants to claim they have a special relationship with the revenue, even though “no one has a special relationship with HMRC” because it is “designed not to give special treatment to anyone”.
Some firms provide evidence for their purported “special relationship” by boasting that they are on HMRC’s R&D Consultative Committee. But as Hailey points out, “anyone who does R&D claims can get on to the committee”.
“The one time I attended a meeting, it was a very large room to accommodate the sheer number of advisers,” he says.
While Hailey’s firm also offers companies advice on tax credits, he stresses that they have never charged contingency fees and steer clear of the aggressive tactics employed by many consultants.
Mass messages
Emails seen by Research Professional News show that some companies refuse to take no for an answer. One consultancy firm, for instance, was told that their target—a scientist—wasn’t interested because she already had an accountant dealing with such matters. But far from being knocked back, the firm immediately followed up with an email offering a second assessment.
“In our experience, there are a number of expenses that are usually overlooked when claiming internally,” said the email. “Our role and expertise in this engagement would be to maximise your claim; that is, to confirm your tax credit claim has all possible expenses qualified.”
The consultant added: “Since R&D is subjective and it’s a matter of how every cost is placed, quantified and justified, we have also in the past helped claim for expenses that were deemed unqualifiable.”
A few weeks later, the same consultant followed up with another email repeating the offer of a second opinion on a tax claim. The firm, said the email, would advise on the “not-so-obvious costs” that could have been claimed for.
New direction?
Now HMRC is fighting back against R&D tax credit fraud (see ‘Tax credit reform’). In November last year, the department said it would boost resources for R&D tax relief compliance, and it promised to create a “new cross-cutting team focused on abuse” of the scheme.
It also said it was undertaking work to “better understand the nature and scale of the error and fraud associated with
the reliefs”.
A consultation on significant changes to the system is due to be published this summer and could become law in April next year.
The government hopes to stop millions in fraudulent claims. Many the R&D sector just want the cold calls to stop.
Tax credit reform
The government’s proposed changes to R&D tax credits have gone some way to reassuring Melissa Strange that “bizarre” efforts from cold-calling ‘advisers’ could be targeted by the reforms.
Under the new proposals, the tax claims will require more detail on, for example, which expenditure the claim covers, the nature of the advance sought, the field of science and technology, and the uncertainties overcome.
Future claims will also need to include details of any agent who has advised the company on compiling the claim, and will need to be endorsed by a named senior officer of the company.
Strange, chief financial officer at the healthcare technology firm Closed Loop Medicine, says she is “really pleased to see recognition by HMRC of the role that these advisers are playing, and the damaging impact they are having on what is a really important and valuable tax incentive for R&D companies”.
But she believes HMRC could also help by making guidance on its website clearer.
“Perhaps by demystifying [the process], that will [help get] rid of some of these people.”
An HMRC spokesperson said it was “committed to tackling error and fraud within the reliefs and continues to take significant steps to do so”.
This article also appeared in Research Fortnight