Don’t fall for the R&D tax relief ‘scam’

Business

Beware of the R&D tax relief scam. Find out how it works, and what you can do to avoid falling for it – and getting fined by HMRC.

Just imagine, it’s a Monday morning and you receive a call on your mobile. A friendly-sounding woman asks if you’ve heard about R&D tax relief. You say you haven’t, and she tells you that lots of small businesses like yours are missing out on tax refunds they weren’t aware they were entitled to.

She asks if you’d like to see if you’re entitled or not, and invites you to book a no-obligation call with one of her company’s experts. You have nothing to lose, so you agree. In the meantime, you quickly Google R&D tax credits and realise what she said was true: HMRC does indeed pay Corporation Tax credits for research and development (R&D) projects. And you can even claim back two years.

Then you take a look at the company’s website. It looks professional, and their online reviews are positive. You feel excited at the prospect of maybe getting some tax back.

Your call with the company goes ahead, and they are happy to let you know that your projects qualify for R&D tax relief. They just need your last two years’ accounts and for you to sign a contract and they can go ahead and prepare your claim. They also need you to give them permission to make the claim to HMRC on your behalf.

Once the company has your accounts, you have another call in which they go through your expenses and ask what percentage of each expense relates to R&D. The clarification of what constitutes ‘R&D’ is a little woolly, and the range is quite wide, but they assure you they are experts in this and very good at assessing successful claims. They may even encourage you to be more generous with your percentages.

After the call, they let you know your claim has been made and you just need to wait and see if HMRC pays out. A few weeks later, you receive a payment from the company in your bank account. You are delighted! It’s almost like free money! Who knew this money was available, and the process so easy?

You may even go as far as recommending the company to family and friends who run a limited company. But in doing so, you might have just dragged them into the same R&D tax scam you have fallen for.

What is the R&D tax refund scam and how does it work?

Here’s how the R&D tax refund scam usually works:

• You receive a cold sales call from an R&D tax relief company
• They tell you that you may be entitled to a tax refund
• They take details from you
• They ask for permission to make the claim on your behalf
• They submit the claim to HRMC
• They receive the money from HMRC
• They pay you minus their commission

So where’s the scam? While it is true you can claim for Corporation Tax relief for R&D expenses, there are very strict criteria, and many of the projects dodgy R&D companies apply for are not valid.

The problem is that HMRC does not usually check R&D claims before paying out. Instead they pay out first, and potentially investigate later. And because the R&D company made your claim, HMRC will pay the money to them, and the R&D company pays you, less their commission (usually around 20-30%).

And here’s the ‘scam’. If HMRC investigate and decide that your claim is not valid, they will ask you to repay the money, and possibly fine you too. That means you need to pay back the money you received, PLUS the commission you paid the R&D company, plus interest – leaving you out of pocket.

Whatever happens with your claim – whether it is ultimately successful or not – the R&D company keeps their commission. So they have no incentive to genuinely check whether claims are actually valid before submitting. In fact, the more claims they submit to HMRC, legitimate or not, the more money they make. And it’s their customers who will pay the price if they get it wrong.

As Darryl Hoy, a former HMRC R&D Tax Relief Inspector, says:

“Unfortunately, there are many R&D tax relief boutiques who aren’t adequately qualified to prepare accurate claims, or who push the boundaries way beyond what is eligible, because they are focussed on their fees and not the robustness of the claims they prepare. If it sounds too good to be true, it probably is.”

Why is this a ‘scam’?

We believe this is a scam because many of these R&D companies do not do the appropriate due diligence to check the claims they are submitting are valid. In fact, we think they KNOW that many are not. Some also do not properly prepare the documentation required to back up a claim. All they seem to care about is the money they will make from each claim – whether it’s valid or not.

The Cambridge Dictionary defines a scam as: “a dishonest plan for making money or getting an advantage, especially one that involves tricking people”. And we believe this is what these companies are doing: tricking businesses into making claims that are not valid so they can make money.

Are you entitled to R&D tax relief?

So how do you know if you have a genuine R&D tax relief claim? As mentioned, HMRC has very strict criteria for R&D tax relief. For work to qualify, it must be part of a specific project to make an advance in science or technology. So you cannot make a claim if your advance is in the arts, humanities or social sciences, including economics.

The project must relate to your company’s trade (this can be an existing one, or one that you intend to start up based on the results of the R&D).

To make a claim you need to explain how your project:

• Looked for an advance in the field
• Had to overcome the scientific or technological uncertainty
• Tried to overcome the scientific or technological uncertainty
• Could not be easily worked out by a professional in the field

When you make a claim, you need to include qualifying expenditure details, provide details of projects you’re claiming for and give a description for each of the projects.

If you’re in any doubt whether your project may qualify – despite what you may be told by an enthusiastic R&D company – double check with an expert you can trust. If you have an accountant, speak to them. And DO listen to their advice. Scam companies are fond of telling their customers that accountants don’t really understand R&D. This statement in itself is a big red flag!

What happens if you make an R&D claim you aren’t entitled to?

So what happens if you make an R&D claim you aren’t entitled to? There are three potential scenarios:

1. You may receive the money and escape investigation by HMRC
2. You may be asked to repay the money plus interest to HMRC
3. You may be asked to repay the money plus interest and pay a penalty

And remember: when paying money back to HMRC you will also need to pay back the commission kept by the R&D company.

What fine might you receive for a false R&D claim?

If HMRC decides your R&D claim was not valid, they may fine you up to 100% of the claim value. The penalty depends on whether they believe the claim was careless, deliberate but not concealed, or deliberate and concealed. Here’s what these terms mean:

• Careless: You failed to take reasonable care, resulting in an accidental error.
• Deliberate: You intentionally made a mistake, but did not try to conceal it.
• Deliberate and concealed: You made a deliberate error and attempted to hide it.

Penalties also vary depending on whether the disclosure was prompted or unprompted. A disclosure is ‘unprompted’ if you made it at a time when you had no reason to believe that HMRC had discovered or were about to discover the inaccuracy or under-assessment.

Here’s the range of potential penalties you may receive for an invalid R&D tax relief claim:

Despite using R&D tax ‘experts’ to make the claim, your business is solely responsible for this fine. The contract you signed with the R&D company will usually absolve them of any responsibility.

How long do HMRC have to investigate R&D tax relief claims?

Most R&D tax relief investigations will happen within a year of a claim being made. But if you’ve passed the 12-month mark it doesn’t mean you are safe as HMRC have up to six years to investigate careless cases of R&D claims, and up to 20 years if they believe there has been deliberate deceit.

And HMRC is clamping down on fraudulent R&D claims. In the past few months alone they have sent out large numbers of Fraud Investigation letters to companies they have identified as being at risk of making an inaccurate claim.

In September 2024, HMRC went even further, raiding the offices of one R&D company, Green Jellyfish, and arresting 11 people “on suspicion of tax relief fraud”. You can read an investigation into the practices of Green Jellyfish in this article.

How to avoid falling for the R&D tax relief scam

So how can you avoid falling for the R&D tax relief scam? Here are some precautions to take:

• Be VERY wary about trusting an R&D company who cold calls you
• Don’t trust online reviews, recommendations or company claims
• Do your own due diligence and check whether your project qualifies
• Always check with your accountant before making a claim
• If in doubt, speak to an R&D specialist to check
• Look up the company on LinkedIn – do they have lots of tax specialists or sales people?
• Beware any company who makes R&D tax relief claims sound easy

Why you can’t trust reviews of R&D companies

The problem with the R&D tax relief scam, is that often you only realise you have been duped when HRMC contact you. Until that point, you believe your claim has been successful, and therefore the company representing you legitimate.

Delighted with your unexpected tax windfall, you might be tempted to write a glowing review of the R&D company. You may even recommend them to friends and family who run businesses.

This is why we recommend treating reviews and recommendations for R&D companies with caution; because they may have been made by people who haven’t yet discovered that their claim was not legitimate, or who unknowingly got away with an invalid claim. And just because they got ‘lucky’ does not mean you will.

Make sure you don’t fall for the R&D tax relief scam

The easiest way to avoid falling for any scam is to remember the saying: If something seems too good to be true, it probably is. And the R&D tax relief scam is no different. Be very wary of anyone who approaches you and makes it sound easy to get free money from HMRC.

Follow the advice above, and do due diligence before trusting any company to make a claim on your behalf. And if in doubt, don’t submit a claim. You could have a very expensive, nasty surprise later.

Please note: There are legitimate companies who honestly make valid R&D claims. This article is not about these companies, but instead aims to help businesses identify the less ethical companies who could lead them into trouble with HMRC.

Read more advice to avoid falling for scams

You’ll find more tips on how to avoid falling for scams in these articles:

• Four social media scams to avoid in 2024
• How to protect your financial data from fraud
• Should you apply for that job? Or is it a scam?
• Five ways to spot fake, AI-generated reviews