R&D tax relief is supposed to help insurtechs, startup brokers and SMEs claw back costs invested in innovation, but this initiative has been ’abused’ to some extent

With the autumn budget approaching in the coming months, research and development (R&D) tax credits are bound to be on the agenda again.

A recent report estimated that, across all sectors of the economy, error and fraud in R&D accounted for £1.13bn of losses between 2020 to 2021.

There are two R&D tax relief schemes relevant to the insurance sector – one for SMEs, which would include insurtechs and startup brokers, and the R&D expenditure credit scheme (RDEC), which covers larger firms.

The spring budget earlier in March 2023 only saw a partial reversal to the planned R&D tax credit cuts for SMEs, which includes many insurtech and SME brokers.

This meant that eligible firms spending more than 40% of capital on R&D would be able to claim back £27 from the Treasury for every £100 spent on R&D.

Although the news “disappointed” the trade body Insurtech UK, it welcomed the enhanced tax support to help R&D intensive SMEs.

However, the most recent change to the rules, which applied from the 8 August 2023, means that all R&D claims now need to be made digitally and provide a breakdown of costs claimed across the measurable categories of expenditure and provide a description of the R&D activities undertaken.

This follows the HM Revenue and Customs’ (HMRC) Annual report and accounts 2022 to 2023, published on 17 July 2023.

The report estimated that error and fraud in R&D totalled £1.13bn of losses between 2020 to 2021 across all sectors of the economy.

This was the equivalent of 16.7% of claims and came in much higher than HMRC’s previous estimate of 3.6% (£336m) for the same period.

HMRC has recently updated its methodology for estimating non-compliance in both R&D schemes, which introduces a lag into the estimates.

Meanwhile, the number of R&D claims have also been rising year-on-year. In 2020 to 2021 there were 89,300 claims totalling £6.6bn, which compared with 43,665 in 2015 to 2016 worth £4bn.

The level of error and fraud in 2020 to 2021 was 24.4% (£1.04bn) for the SME scheme and 3.6% (£90 m) for the RDEC scheme. Expenditure on R&D relief during the year was £6.8bn.

In other words, errors and fraud in R&D tax relief is becoming a massive problem. 

Not regulated

Earlier this week, I spoke to Justine Dignam, director of incentives and relief at Markel Tax, who referred to the growing R&D tax credit issues as the “next PPI scandal”.

The payment protection insurance (PPI) scandal involved millions of customers being lured into making a claim for missold PPI. 

Markel Tax is a UK-based independent tax consultancy and fee protection insurance provider. It provides its accountancy partners with specialist tax advice and resources.

The issue, Dignam explained, is that “anybody can start an R&D business, because the sector is not regulated –ultimately it’s all self-assessment”.

She explained that the directors of the business would be held to account by HMRC if this type of fraud is discovered. 

Dignam continued: “The reputation of R&D has been tainted somewhat because of the spurious claims. We have been vocal about it for years because we have seen that what was a niche area of tax turned into a free-for-all over recent years.

”But, much like the PPI scandal, there has also been a lot of rogue R&D cold callers operating.

“Where we’ve seen huge increases of R&D businesses opening up across the country, there’s been a lot of aggressive cold calling with people being told that they can make an R&D claim.”

Claims made must meet a threefold qualifying criteria – the claim must demonstrate that it has tried or had to overcome a science or technological uncertainty. Secondly, the firm must demonstrate it has looked for an advance in the field. Thirdly, the claimant must not be a competent professional in the field able to solve the issue without an R&D credit claim.

Markel Tax declines, on average, eight out of 10 opportunities because they are not R&D compliant and presented by referral partners.

Dignam continued: “Over 60% of submissions reviewed that have been complied by external providers and now subject to HMRC enquiry have resulted in us advising that the claim should be withdrawn. 

“In the event of an HMRC enquiry into Markel Tax submission, we stand over all our claims, so we’ll defend them without any further fees to the clients. we will only submit a claim if we have undertaken a robust process to ensure there us a valid claim.”

For brokers, Dignam said: “An insurance broker is always looking forward. Any clients they [brokers] are looking to bind, they will need to know if any R&D activity is taking place.”

She provided the example of a new product being developed with R&D activity attached to it, but a risk being involved should the product have to be recalled.

Risk to genuine claimants

Despite a growing problem, there is risk of genuine claimants being tarnished by the rise in fraudulent R&D claims.

Dignam added: “When something is abused, it puts genuine claimant companies off claiming. [But] the government are really keen for businesses in the UK to innovate.

“This compliance, this rigour by HMRC [and] the admission about the amount of money that’s been lost from the public purse will start to close the net on rogue providers.”

Therefore, Dignam said she would like to see licencing for R&D, as well as more transparency.

However I know that many insurtechs, startup brokers and SMEs depend on this credit to survive, so I would hate genuine claimants to miss out.

But there does need to be a more rigorous process applied to avoid stretching the public purse too widely and a communal effort from the insurance industry to make genuine claimants aware of fraudulent R&D cold callers, so they are not impacted by this mess.

This developing issue also runs the risk of following in the footsteps of rogue claims management companies (CMC) in personal lines – and nobody wants that.