Are investment portfolios at risk due to R&D mis-claims?

Part of this is a far stricter approach to HMRC enquiries, with a real focus on digital-first approaches to claims as a means to receiving far more reliable data. This has seen the public body make it crystal clear it will recoup funds from businesses that have been acquired from false or inaccurate claims. Enquiry rates from HMRC have jumped from 1% to 20% over the past year, and HMRC’s Mandatory Random Enquiry Programme (MREP) initiative adds another layer of risk. It takes a random selection and detailed examination of a representative sample of claims to help HMRC identify common errors, potential fraud and misunderstandings of eligibility criteria. 

This increasingly critical position taken by HMRC poses a hidden risk for investor groups like VCs, PEs, incubators and accelerators who are backing fast-growth tech firms, but is one that few have likely considered. As the R&D scheme remains an important source of non-dilutive funding among ambitious tech businesses, investors need to be aware of the bigger picture.

Constantly on the lookout for the next vanguards of innovation, it’s in the best interest of investors to encourage their portfolio companies to give themselves the best chance of R&D claim success, by making an accurate, efficient, compliant and robust submission to HMRC.

What are the challenges faced by portfolio companies making claims?

R&D is a complicated claim process; it’s not a quick exercise and very few businesses make one-off claims, so it becomes a repetitive cycle. This complexity will only grow as the scheme evolves. Now, think about the time lost to the relief scheme that really should be dedicated to R&D itself. The problem is, the claims process sits outside, above and beyond, what engineering, scientific and software development teams are responsible for on a day-to-day basis.

As a result, it becomes a significant opportunity cost for businesses. And with the current trend of increased HMRC scrutiny, this cost is likely to increase in the near future. To meet the rigour that HMRC is dictating, teams are likely going to witness a material uplift in resource needed for the process.

The cost to the business comes not only from time lost to the R&D relief scheme preparation, but from context switching across teams. It takes significantly more effort to jump from task to task, especially when one activity sits well outside your normal wheelhouse.

What does this mean for investors?

Watching time and resource being haemorrhaged within their portfolio companies through this enquiry process is nothing short of alarming for investors.

Given HMRC typically pays out on claims within 40 days, and enquires many months later, there is a high likelihood that these funds will have already been spent by businesses by the time an enquiry comes around. In the worst case scenario, if a mis-claim results in an enquiry and subsequent repayment, this could cause a risk of insolvency for businesses that don't have the funds to repay. Any investment at that point is lost, and investors are left out-of-pocket due to a process they didn't have oversight of in the first place.

It's important for investors, therefore, that their portfolio companies follow HMRC’s digital-first approach to ensure they claim accurately, honestly and compliantly first time around, to help future-proof their investments and avoid repayments that could put the future of their valued portfolio at risk.

Turning R&D claims into strategic advantage

The R&D relief scheme is a unique opportunity for investors to maximise the value of their investment. If for every £1 they put in, the portfolio company receives £1.20 through the use of R&D relief, cash is then recycled back into the R&D engine. This triggers a compounding effect over the years.

The ultimate goal for investors is to get more bang for their buck – but this will only happen when claims are done properly. Timing is a crucial factor. There’s an added benefit of making a claim as close to the company’s year end as possible. Having the activity fresh in mind not only helps them build a more robust case, but also helps if they end up needing to defend an enquiry.

There’s also a real incentive for investors to encourage portfolio companies to follow HMRC’s digital-first strategy and build a system that makes R&D claims easier, more efficient, and crucially more robust in the long run. Taking every precaution to de-risk each claim and instil confidence across businesses and investors is vital, which is why it doesn’t hurt to bank some of the credit until the enquiry window passes, just in case. As all businesses that have gone through this process will know, claiming R&D tax credits can be complex and carry risks of misclassifying costs, missing documentation, and sometimes just plainly failing to meet requirements. This is where technology and credible providers can play a huge role. Leaning on those who have vast experience of the process and a track record of submitting successful claims is a strategic move.

For investors and their portfolios, the R&D relief scheme brings huge value; establishing a robust process using technology to capture and analyse data will enable companies to evolve plans beyond the finances they have, to factor in R&D claims as part of longer-term growth strategies.

Hari Sandhu, founder of EmpowerRD.