Billions of pounds are being lost to fraudulent claims for research and development (R&D) tax relief every year. But what is the controversial tax scheme, how is it being exploited and what does it mean for firms being targeted across the East?
The UK loses more than £1bn to fraudulent R&D tax relief claims each year, and the taxman is cracking down.
Last week HMRC raided offices in Norwich city centre on the same day that 11 people, including tax agents, were arrested across the country on suspicion of R&D tax relief fraud. A number of others were invited to attend an interview under caution.
Officers from the tax authority stormed the Union Building on Norwich’s Rose Lane and executed warrants at the companies Green Jellyfish and Kirby & Haslam.
But both firms said they had "nothing to hide".
Green Jellyfish is believed to be one of the largest firms involved with the scheme, making £3m a year in profits.
So what do firms in Norfolk and Suffolk need to know?
WHAT IS R&D TAX RELIEF?
R&D tax relief was created as an incentive for companies to invest in innovative projects in science and technology to help grow the UK economy.
There are two schemes:
-R&D tax relief for small and medium-sized enterprises (SMEs)
-R&D expenditure credit, aimed at larger businesses.
To qualify for the tax breaks, companies must provide proof of projects that have:
-looked for advances in a specific field
-overcome, or tried to overcome, a scientific or technological uncertainty
-or not been easily worked out by an existing professional in the field.
R&D tax relief costs the UK about £8bn a year.
However its latest accounts show £4.1bn has been lost on the schemes due to error and fraud since 2020.
Error and fraud in the scheme for smaller companies made up an estimated 26 per cent of relevant expenditure in 2021-2022, or £1.2bn.
GREEN JELLYFISH
Green Jellyfish, which has its registered offices at 46 Rose Lane, is one of the companies in Norwich that the HMRC raided on September 24.
It makes claims on behalf of its clients promising “no win no fee”.
But Green Jellyfish has been accused of targeting and submitting claims for companies alleged to be ineligible for R&D tax relief.
These businesses allegedly include plumbing and heating firms, care homes, restaurants, childcare companies, cleaners and small therapy businesses.
Often when an R&D claim is submitted HMRC immediately pays the refund.
It generally operates a ‘refund now, check later’ policy, as checking every claim would mean processing refunds for businesses would take months.
This can be exploited by firms that make R&D claims on behalf of other companies as they can take their fees before paying their clients.
If HMRC open a compliance check into a claim it is the business owner who is ordered to pay back the refund, plus interest and penalties.
But the firms making the claims have already taken their fees, leaving small business owners out of pocket.
After the HMRC raid, it said: “We understand that HMRC has a job to do, and we are fully cooperating and supporting them with the investigation as we have nothing to hide.”
In a statement sent to this newspaper last month prior to the arrests, GJ2020 Ltd (trading as Green Jellyfish), said: "It has never been the intention of Green Jellyfish as a business to submit a claim knowing that it would not qualify for relief.
“We would like to stress that a HMRC compliance check or R&D assessment is inherently subjective.
“The decision on whether a claim qualifies rests with the HMRC officer conducting the check.”
It added: “Green Jellyfish emphasises that their R&D tax relief submission process is thorough and client-led, adhering to HMRC guidelines.”
Accountancy firm Kirby & Haslam was also raided by HMRC last month.
It is registered at the same address as Green Jellyfish, at 46 Rose Lane in Norwich.
Green Jellyfish is believed to have passed clients on to Kirby & Haslam after HMRC had opened compliance checks into its claims.
The firm, like Green Jellyfish, insists it has “nothing to hide”.
“We welcome the investigation from HMRC and understand they have to look into all claims made,” a spokesman said.
“We have been and will continue to be fully cooperative as we have nothing to hide.”
HMRC refused to confirm the names of the businesses raided in Norwich on September 24, saying "we do not comment on identifiable taxpayers”.
Eleven people, including tax agents, were arrested on suspicion of R&D tax relief fraud at business addresses across the country. A number of others have been invited to attend an interview under caution.
Jonathan Smith, HMRC’s director responsible for agent compliance, said: “These arrests are just one small part of the comprehensive and wide-ranging action we're taking to tackle suspected R&D fraud.
“We’re committed to supporting honest businesses, and their agents, to get the tax reliefs they’re entitled to.
“We urge anyone with information about any type of tax fraud to report it to HMRC online.”
A HMRC spokesman added: “The level of non-compliance we have seen is unacceptable and taxpayers rightly expect us to scrutinise claims.
“That is why we have increased compliance activity. We do that thoroughly and fairly.
“We are also taking action against dishonest tax agents who encourage or facilitate customers making false claims for expenses, rebates or tax credits.”
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