ESG integrity: Are you confident in your claims for sustainability-related tax relief or incentives?

Has your organisation been claiming sustainability-related tax relief or incentives?

If so, are you confident that all the claims that have been made comply with existing and upcoming rules and regulations?

Many of these claims are governed by self declarations. That means they depend on accurate and truthful reporting, leaving them open to fraud.

And fraud is on the rise. Our latest Fraud Barometer identified a staggering increase of 141% in the number of frauds brought to the courts last year, amounting to losses approaching £1.12bn.

As a result, the Government is cracking down through new rules and regulations. And it’s not just looking at new claims. Any declarations you’ve made in the past could also be subject to additional scrutiny.

Fall foul of the new regulations and you could face significant financial penalties. And don’t underestimate the reputational risk. You should be increasingly wary of the threat to your brand posed by investigative journalists, bad press on social media, and activist investors.

Let’s take a look at this issue in more detail.

The Government is set to introduce new laws as part of The Economic Crime and Corporate Transparency Bill 2022. These will introduce a new ‘failure to prevent fraud offence’ for large businesses.

That means you’ll be held to account if you profit from fraud committed by your employees.

The new legislation is designed to protect the public from a wide range of harms. This includes dishonest sales practices and false accounting. It also includes intentionally hiding important information from consumers or investors.

Given that, we think it could cover ‘fraudulent statements’ that relate to sustainability or ESG matters if they’re considered intentionally misleading – or if you don’t put in place reasonable procedures to prevent fraud.

And the Competition and Markets Authority, Advertising Standards Authority (ASA) and Ofgem, to name but a few, are taking action on misleading sustainability claims. For example, the ASA is introducing a ban on adverts that claim products are carbon neutral through the use of offsets, and is more strictly enforcing the use of environmental terms such as ‘net zero’.

Recently HMRC has launched a consultation on tax in relation to environmental land management schemes due to a lot of uncertainty which could lead to inadvertent non-compliance.

It’s no longer a defence to claim you were not aware of what was happening. It’s your responsibility to put in place measures to prevent fraud, including in the sustainability arena.

So, what should you be looking at to mitigate the risks?

Start by reviewing existing processes – especially if they’ve been in place for a long time. Are you confident that you’re submitting claims with the proper level of scrutiny? Were these processes built with the right checks and balances to identify possible fraudulent activity?

Any claims you’ve been making on an ongoing basis over a sustained period of time are likely to face heavy scrutiny. When you made them, ESG may not have been in the spotlight like it is today. There probably weren’t the same number of social activists looking out for companies to name and shame.

Now there are. So, you need to go back over your claims and check you approached them with the same level of rigour you’d need to apply today to meet the demands set by UK and international regulators.

One specific area to look at is R&D tax credits, which are available to any business.

Fraudulent claims against these credits are estimated to have cost the UK economy £469 million last year alone. And that’s why HMRC announced earlier this year its intention to crack down on fraudulent or false claims.

Now, you may not have associated R&D tax credits with ESG. But as businesses strive to hit their net zero targets, many will be looking for financial support or incentives. And that’s likely to see more claim R&D tax credits to innovate on ESG.

If you’re thinking of applying – or have already applied – you need to take care that your claim meets the definition of qualifying R&D activities. And you’ll need to declare the associated costs you intend to claim credit against.

If this has got you thinking about your claims for sustainability-related tax relief or incentives, or you simply want to know more about fraud prevention, please get in touch with our KPMG Forensic and ESG Integrity team.

We can help you understand how well your business is prepared to prevent and respond to fraud.