Software devs targeted as British tax authority makes fraud allegations Software firms and other companies developing innovative code have been accused of fraud and had tax relief payments stopped as a result of a broad-based campaign executed by the UK tax collector. HMRC's Fraud Investigation Service has written to software companies saying their claim for R&D tax relief was fraudulent. "The …
When I was running a small bespoke software development company, we made use of a consultancy who managed very successful R&D tax relief claims for us. It brought in significant cash for the company, and TBH saved its bacon at the time in terms of cashflow.
However, I was always wary of the consultants' definition of "innovative" in our claims for work on what was really day-to-day development activity were submitted and approved. The argument seemed to be "did the developers involved have to research or think about how to do this bit of the project?". If the answer was yes, then the project was added to the claim. Even when the project was pretty bread-and-butter. The argument seemed to be that every bit of bespoke software could be "innovative" and needed a bit of research.
So maybe a case of chickens coming home to roost?
But a blanket "We think you're fraudulently claiming" letter is definitely a bit excessive!
AC for obvious reasons.
Beat me to it - exactly the same here. I don't know if it's when the tax credits system came in or because someone noticed it but it was mid-2000s and I was PM in charge of a bunch of projects delivering comms kit to infrastructure and defence organizations. The bosses hired consultants from PWC who grilled the engineering teams and tried to put words in their mouths so they could put as much as possible in the "innovation" column. It got silly cos most of the work was just configuring and tweaking our standard kit for customer specific requirements - IP plans, site-specific connector changes, screen overlays, UPS distribution, and most of this was done on the hoof by the I&C team. I bet PWC cost more than the money we got back cos we never went through it again.
PwC's R&D claims were generally done on a contingent basis, where they took a relatively small percentage of the credit you got - it was usually very worthwhile both for the clients and PwC.
I agree that the net was drawn pretty wide for software claims, although HMRC certainly seemed to be accepting of this approach at the time.
Also a small software firm. Our R&D process is run by our accountants, but that didn't stop semi-regular emails from firms offering to file R&D claims for us despite not knowing anything about us.
I gather from our accountant that a) HMRC were tightening this up and b) abuse was rife. I think he mentioned hearing of a a hairdresser claiming it at one point, which I'm still struggling with. It's been good for us, but then we've been developing a product for many years which only launched last year, so no income all that time - and it's innovative. That's genuine R&D as far as I'm concerned, and I've always been prepared to back that.
I used to run an Electronic Engineering firm whose products were a blend of mechanical, electronic and embedded software components. I used to look after the R&D claim (no consultants allowed on my watch!) and used to categorise each engineer's time to non R&D (product maintenance, obsolescence & production problems, not to mention holiday and sick pay) and R&D (exclusively new product development). It was all quite simple, and I wrote an annual report justifying why I considered the claims valid. HMRC were quite happy with that, and the credits obtained helped fund some quite impressive projects - which of course kept our people employed, being the whole point of the exercise.
Our accountants wanted to claim more than I was asking for, but I wasn't prepared to screw a few more pennies out in exchange of more detailed reporting. They used to point out that the banking system were one of the biggest beneficiaries of R&D credits, as each new loan vehicle or investment opportunity were seen as new novel ways to extract cash from the poor punter. The reporting threshold was so low anyone could, and did, claim for anything. A tightening up of the scheme is long overdue, but to accuse everyone of fraud is very heavy handed.
As with all things to do with tax, the system needs to be simplified and focussed on the original aims of the scheme. I remember Gordon wanted to help businesses grow by developing new products, but I don't recall the need to inflate banks profits (that came much later in his tenure).
In my experience most R&D/innovation is more in the area of marketing than actual software innovation. It seems to be about re-badging an old idea or re-positioning someone else's ideas.
The chances of HMRC being able to judge the difference are pretty much 0.
I suspect all software houses are claiming R&D tax credits.
I'm usually the one that has to come up with the words to justify the innovative nature of development.
It is not particularly difficult as the bar is set so low.
Allmost all development we do is bespoke and one off. I can't think of a single project that we have done that was similar to a previous one.
The amount we get is not particularly large but it is significant for a small company. It amounts to half a developers cost for a year.
It can make the difference between making a profit or loss.
My last place used to claim for test and release of the product. Now that was taking the pee.
Perhaps these accusations of fraud were careless, not deliberate.
If the goal of the tax relief scheme is to encourage improvements to the "state of the art". The first question to ask is "show me the patent application or work you have in progress creating the application". Protecting IP is a duty for company officers and if the work could truly improve the state of the art they should have some process in place to project their investment from being copied/stolen.
Anything can be patented if you have enough brown envelopes. These days any stupid thing goes through, as there is too many applications to process. The idea is that if patent is invalid, it should be contested in court after it has been granted.
If you look into patents, chance is everything you do is already patented and likely the patent is still live. It's even things like let's say you build a search feature in your application and you want to display a list of related categories with the results. Nope. Can't do that it has been patented :)
As someone who used to work for one of the Big 4 and handled quite a few software claims, they're dead right, just 15 years late in waking up to the fact that the bar for a software claim has always been way too low (with HMRC's acquiescence, although whether that's through lack of expertise or deliberate policy, I couldn't say)
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"To qualify for tax relief, software development needs to represent a novel approach to solving problems, or an advancement in a field, such as a new database architecture design. Most day-to-day development will not qualify, but the complexity lies in understanding what does."
The loophole seems to be around what "novel approach" means in relation to solving a given set of problems.
Consider a company that has collected a proprietary set of data for a very specific sector. They could write off the costs building and maintaining that dataset, whilst doing zero work in terms of the software that sits underneath or on top of it. They could claim the output of that work was "a novel approach to solving problems" simply on the basis it used data that nobody else had access to. Their application would be useless without the data so the end result of what they built was "an advancement in a field" in whatever sector they were working.
Lest we forget that if said application became a success HMRC would possibly end up getting further tax revenue from the sales. I do wonder how this correlates with GOV UK's desire for the UK to be full of innovative businesses? Dangling the carrot from the taxman whilst getting them to kick said innovators in the knackers at the same time.
Anon as I'm a civil servant ...
tax inspectors were absolutely sticklers on appearances
I'm not surprised, though it does seem a bit excessive.
Contrary to popular opinion, fuelled by tabloid headlines and the goings on in Downing St, the civil service has very strict rules - some of which basically boil down to "you cannot gain any benefit (other than your official remuneration package) from being a civil servant". It's not just the "you cannot" bit, it's also the "you should not give the appearance of" bit. So as well as not doing anything wrong, you shouldn't be doing anything that could be seen as doing wrong.
And I imagine they are very strictly enforced in HMRC given the scope for complaints. In my little corner of the CS, the rules do allow for accepting something like light refreshments where a genuine business meeting does run through a lunchtime - which is a good thing as the T&S allowances don't allow for us buying our own without being out of pocket. But for HMRC, it's a department where many of it's staff will have interactions with the people and businesses it deals with - so there's a lot of scope for finger pointing. A simple light lunch of sandwiches is probably something that few, if any, could or would complain about - but if you allow that then there will be some that will push the grey line a bit, then a bit more, ..., until you get into "definitely not inconsequential" territory.
At times the rules are "a bit annoying". In the past when I've been in the private sector, if you see something heading for the skip then a simple "any chance I can have that" is usually met with "here you go, saves us paying to get rid of it" sort of thing - much of my home IT is such hand me downs. But in the CS world that's absolutely forbidden - it either goes in the skip, or it goes out for disposal via the normal routes and we would have to buy it via the same routes as the general public. Just having the disposals group tip you off to when it's going on sale would break the rules as that would be using information for personal gain that is not available to the general public. When you see an office full of "not brilliant, but good enough for a secondary monitor to park the tool windows on" displays heading for a skip (you know they won't sell them on, the value is too low to be worth while), one does sometimes wish for a more relaxed approach - but then, you'd quickly find people taking the urine and it's not far to reach corruption city.
"One of them is a large audit client in the software sector, with contracts with government bodies, so to accuse them of fraud is quite egregious."
Gosh, yes, you wouldn't ever want to accuse anyone who has contracts with government bodies of fraud, they're all such upstanding figures...
Serco/Deloitte: https://www.civilserviceworld.com/professions/article/serco-to-pay-23m-after-serious-fraud-office-probe-into-moj-electronic-tagging-scandal
G4S: https://www.google.co.uk/amp/s/amp.theguardian.com/business/2020/jul/10/g4s-fined-44m-by-serious-office-over-electronic-tagging
Capita: https://www.times-series.co.uk/news/17318488.capita-rejects-report-2m-fraud-barnet-council/
of making of screwing mere mortals over again and again while letting the likes of Amazon, Google etc off with paying less in taxes (excluding VAT) every year.
All driven by the numpties in the Treasury who are just making sure that their post Civil Service retirement job with aforesaid mega corps is safe.
Yours, disgusted of Tunbridge Wells who paid more in income tax in 2020 than President Donalt Trump did.
The who frigging system is screwed up big time.
while letting the likes of Amazon, Google etc off with paying less in taxes
This is a huge misconception. HMRC has nothing to do with this. Those companies generally speaking do all of their tax planning legally. It would be stupid of them not to given they are businesses.
Yes it's incredibly immoral and the Government could arguably do more to make the system robust. But then you'd probably see some other downsides including companies not wanting to operate in the UK if it was heavily against their favour to do so. That has knock on effects on jobs, welfare payments, social mobility, etc.
It's a real tightrope and difficult area. The notion of "tax big companies more and that'll make everything better" is ludicrously shortsighted. I see it both ways.
This is a huge misconception. HMRC has nothing to do with this. Those companies generally speaking do all of their tax planning legally. It would be stupid of them not to given they are businesses.
Such a nonsense. HMRC has ways to plunge their teeth into these companies like Diverted Profit Tax framework. Just because something is legal, doesn't mean is allowed. Look how HMRC dealt with people using various remuneration schemes that even HMRC said were legal and approved by them and then people got retroactively taxed.
It's so obvious companies are fiddling the tax - you can look at SMEs average revenue to tax ratio in a given sector and compare that to a big corporation. Why do they have that offshore holding company? Does it make business sense or it helps lowering the tax bill? If SMEs don't generally have offshore holding company then it's the latter. Get that company to submit all offshore transfers dating back 10-20 years, slap a tax on it and a penalty for a good measure. Do it for a few large corporations and the problem will be gone within a year.
There is simply no will, because big corporation can set any tax inspector for life, they can afford it and nobody is scrutinising the tax man.
> Look how HMRC dealt with people using various remuneration schemes that even HMRC said were legal and approved by them and then people got retroactively taxed.
That's because HMRC, again, whose only job is to write down rules for giving it money and then collect that money, is so bad at this that they keep changing things. You should've seen how many times they changed their IR35 guidance to make sure that it generated the money they wanted to get out of people. Sometimes it changed day by day.
Remember: we work to pay for them to write down rules and take money. That's their only job, and a pretty nice one it is too. And they still aren't very good at it.
Legal does not necessarily equate to being a good thing (can be legal but morally repugnant)
e.g. before 1992, forced sexual activity within marriage wasn't illegal in the UK.
i.e. legal for a man to rape his wife.
I don't think anyone reasonable will say that was a good thing just because it was legal at the time.
Similarly anti woman, as an older female friend of mine often mentions, until the mid 70s it was legal for banks etc to treat men and women differently and essentially if you were a single working class women then getting a mortgage in just your name was essentially impossible until then (i.e. if you were not a "professional", as banks did make a few exceptions for some "well thought of" professions and (of course) the very wealthy who often had no job). My friend had an irritating wait to be able to switch from rentals and "buy" (mortgage purchase) a house for herself & her child (husband had long since ****** off, started his divorce plans when he found out she was pregnant!)
The inverse is also true. Even though most women would reduce their work or stop working, legally their salary pre-children had to be counted at 100% weighting. Your friend might be mis-remembering (assuming it's the UK) that a woman's salary could be counted at I believe 75%. This is per my mum, who was the first person in her company at the time to experience this.
But my mum, correctly, doesn't think that this was great. All it meant was higher bids on existing house prices, driving prices up and making it harder for single and/or first time buyers, while one-time enriching existing homeowners. It, along with zoning regulations, is one of the two reasons why house prices have so badly outstripped salaries.
This much of a misconception eh?
https://www.independent.co.uk/news/uk/politics/googlestyle-sweetheart-tax-deals-between-hmrc-and-internet-giants-may-never-be-made-public-a6835671.html
Go on, downvote, I don't care. You can talk to yourself about how great De Piffle is/was, Brexit is/was, you know its all shite, At least have the personality and intelligence to admit it to yourself.
As anything with HMRC, these sort of tax avoidance schemes were set up for the rich corporations to use. Once the pleb found a way to get through the forms, it's suddenly fraud!
Of course I am simplifying, but there were plenty of these in the past - most notably when the rich were paying themselves in loans. The pleb figured it out and started using the same schemes and HMRC got a fit.
"As anything with HMRC, these sort of tax avoidance schemes were set up for the rich corporations to use. Once the pleb found a way to get through the forms, it's suddenly fraud!"
Well said - witness IR35. Partial remuneration in dividend has always been provided for maga-corp directors and the like and considered perfectly legal, until ordinary folk like contractors did when it suddently became "fraud" in their specific case. It probably still goes on among the mega-corp crowd and gets "overlooked" by HMRC.
A number of commentards above have said that R&D was a scheme to benefit the big boys. That's not actually true as we're talking specifically here about the SME R&D scheme. Yes the definition of SME is quite wide (turnover of up to £100m) but big companies use a different scheme called RDEC which has quite different rules.
I've done the R&D claim myself for a tech business I co-founded and we've been claiming for years. The first year we claimed, HMRC assigned our tax affairs to a specialist office in Portsmouth that primarily handled pharmaceutical companies (as historically most R&D claims have been in this sector). They asked a few questions about the project, how we'd calculated our costs, then that was it. Subsequent years the claim was waved through. This is probably because every year I prepare a couple of pages based on HMRC's manual at https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird80000 explaining what the project is, who was working on it, and breaking down the costs we claimed under the relevant categories of expenditure.
I note that from April 2023 onwards it'll be mandatory for companies making a new R&D claim to do exactly what we've been doing voluntarily for years.
I'm not surprised HMRC are cracking down on claims - as others have mentioned fraud is rife, particularly in the tech sector. I attended a webinar a few years back where a few of the more ethical claims companies (ones that only charge a few percent and don't make up their claims) were open about the fact a number of large claims companies blatantly encourage their clients to fiddle the figures (which was costing them business when they refused to do likewise).
Pirate, cause that's what most of the dodgy claims companies are!
A number of commentards above have said that R&D was a scheme to benefit the big boys. That's not actually true as we're talking specifically here about the SME R&D scheme.
That's of course in theory and you can believe that if you were born yesterday, however - how this works for the big boys is as follows: Big corporation has an idea to test. They get someone from the board or trusted person, a patsy, with the seed money to set up a completely new company. The company does all the needed research and claims all possible tax reliefs.
If the idea works, then simply company gets "acquired" if not? Oh well, onto the next one.
That's covered - there are rules that cap the amount that you can claim for R&D done by another company, and there are also rules around 'connected parties'.
Also, a couple of years ago they came up with a clever way to further reduce misuse - when you claim for R&D you can either take a deduction on corporation tax payable or surrender the relief for a cash credit. If you choose the latter the cash is now capped at 3x your total PAYE/NI bill for the year. Don't employ any staff and thus don't pay much tax? Fine, you'll only be able to claim a very small cash credit, so all you'll be able to do is carry forward the loss. Don't make a profit for three years? You then lose the carried forward losses.
Ironically I have just filled out one of these, so a few observations. . Basically my manager said, we spent so much on development, put a claim back for a tax credit. So i dutifully wrote something up. Did I lie? no. Did I gild the lilly? Maybe a bit, but lie? Of course not
Now it was not something I wanted to do, because I felt what we did was not really innovative, but here is the 1st issue. What is meant as innovative? If it was say mechanical engineering it would be relatively clear cut, but it is far harder to define in software. For example the code maybe common, but its use case maybe different. This is why software patents are so bad, you have an almost infinite way to use things, and having a different application could be considered innovative.
Here is the 2nd issue. I am not a lawyer, so I don't know what the government definition of innovation is. I put my case out what we did, I try and make it as attractive as possible and then assume an expert in my field would say whether it is innovative or not, bit like a patent application. However what I guess is really happening is the dept is overwhelmed, civil servants with no knowledge are just rubber stamping them and then something is coming up which is totally bogus, and suddenly there is some major arse covering.
The 3rd issue is that lets face it, there are many obstacles in doing R&D in the UK. As a % of GDP on R&D we are just behind Estonia. This heavy handed attitude by the HMRC is not going to help, and it may make companies think twice about claiming tax credits, or whether to do R&D in the UK at all. The problem is not the companies trying to claim tax back, but a system which is just not designed very well
If it was say mechanical engineering it would be relatively clear cut, but it is far harder to define in software.
That's because you are not a mechanical engineer. There is not much difference between many engineering field when it comes to innovation. Everything is built upon prior art and whether something is truly innovative you can debate until the cows come home.
If the term is so open ended and whether you get a penalty or not depends on someone's opinion, this is exactly done to facilitate corruption.
For a general understanding of how messed up the taxation system in the UK is consider this quote from David Cameron about Jimmy Carr when the latter was found of being a tax dodger:
"People work hard, they pay their taxes ... He is taking the money [and] is putting all of that into some very dodgy tax avoiding schemes."
"There is nothing wrong with people planning their tax affairs to invest in their pension and plan for their retirement - that sort of tax management is fine. But some of these schemes we have seen are quite frankly morally wrong."
"It is not fair on hardworking people who do the right thing and pay their taxes to see these sorts of scams taking place."
The entire taxation system is so full of loopholes that we end up with somebody who was at one point Prime Minister using the phrase "that sort of tax management". What sort? A sort that's legal, or one that bends the rules? Or one that's illegal yet many people have managed to work around that? What about the "hardworking people" trying to do "the right thing" who are making legitimate mistakes over taxation issues because the entire system is as clear as fucking mud?
Big corporations - despite how people criticise them over their tax affairs - are, generally speaking, operating within the law. To use a Cameron-ism "that sort of tax management is fine".
In other words feel free to operate on the margins of what's legally and morally acceptable. If somebody doesn't like it you'll get a fine. If not, then hey-ho, jobs a good 'un. You won't know until a letter arrives that tells you which end of that spectrum you were in, and you have no particular way of determining whether you'll get such a letter at all.
In other words feel free to operate on the margins of what's legally and morally acceptable. If somebody doesn't like it you'll get a fine. If not, then hey-ho, jobs a good 'un. You won't know until a letter arrives that tells you which end of that spectrum you were in, and you have no particular way of determining whether you'll get such a letter at all.
This is an effect of Tories spending too much time with Russian oligarchs. This is exactly how things have worked in Soviet Union. Party to have a control needed to set up laws that are ambiguous and open to interpretation, so that when someone or something goes against the party they could easily charge them with something.
You see now the effect will be that small and medium business will fear HMRC "might" and won't apply for those R&D credits even if they had a very valid reason to apply. It's like having Damocles sword over one's head. Even if you think you are right, your accountant thinks everything is in order, hell you even commissioned independent report over your application and it came in full support of the application, there is still going to be that doubt, that some inspector at HMRC will have a bad day and will single out your company application. Can you afford to have years of court battles? The stress over your head? Anxiety? How is it going to affect your business moving forward?
And the effect is achieved - these tax credits are meant for chums, party donors, the rich. They can afford an army of solicitors to straighten HMRC or to simple pass on some brown envelopes.
The entire taxation system is so full of loopholes
There's a company that publishes a guide to what our our tax laws actually mean each budget and IIRC it's currently a set of books running to 15,000 pages (maybe more). With a tax code that complex it's no wonder arguments about what tax is actually payable are more complex than medieval theologians' disputes about angels and pinheads. In comparison, until the PRC got heavy with Hong Kong, their tax code could be summarised in ~100 pages and was regarded as highly efficient and simple.
@Arthur the cat
"In comparison, until the PRC got heavy with Hong Kong, their tax code could be summarised in ~100 pages and was regarded as highly efficient and simple."
This is something we need but wont be done as it costs jobs (a lot less administration) and its more fun to add than remove.
This might be stating the obvious, but there's a huge amount of tax work that reduces your tax burden, and is legal. There are no loopholes, only things that are allowed. You might say that well the poor people at HMRC can't keep up with unintended consequences, but it's worth remembering that all they have to do is write down a set of rules for how much they get paid from everyone's effort, and enforce them. They don't have to do anything themselves. Their one job is to write down some rules that if people break them then we will lock them in a box. I wish we could all make money so easily.
As for multinational corporations: they will always be tricky when taxation is national and the corporation is multinational. That fundamental mismatch is the issue, not corporations trying to avoid tax.
Finally: all this is just corporation tax. When the money leaves the company in a way that profits individuals, i.e. as salary or dividends, then it is taxed. People in corporations get the benefit of their corporations' success through those routes, and those routes are guarded by tax already. Corporation tax is a way to tax the internal operations of a business, and for the life of me I don't see why we're okay with the government dipping into that and causing so much time and money to be spent on understanding it (and its exemptions, e.g. R&D tax credits). Just scrap the thing and tax the outflow of money to people.
I've had somewhere between 1 to 4 LinkedIn messages every week, for the last 5 years or so. Telling me I can claim r&d tax credits, and the frequency has only increased over time. Occasionally I'll engage them and say I don't think it qualifies but they are quick to say they have an accredited team ready to access and back up any claim. I think these companies are soon going to vanish.. loan charge scandal, move aside, here comes the r&d tax claims scandal!
Fyi - The one time there was scope for a claim the client had already claimed it which prevents are subcontractor claiming it.
If a claimant takes the time and expenses hit to decide to make an initial claim for R&D expenditure then that same information - with some evidence of performance of those claimed R&D activities - would not cost a lot more to submit (the donkey work should already be done). If an ad-hoc claim was made with no background then it would indeed cost significant time, effort and money to evidence and justify that claim when the " 'ello, 'ello, 'ello" letter falls on the doormat. Any business will recognise the wad of expenses receipts that are kept to evidence financial activities that are claimed against tax ... apart from the methodology of generating/keeping evidence, why should R&D activity be any different?
Suggesting every claimant is fraudulent is plain nasty but asking companies to evidence their claims on the public purse is more than justifiable.
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