Action on R&D error and fraud vital but should not be at the expense of genuine claims, Institute urges

Published yesterday by HMRC, the updated estimate of the overall level of error and fraud for both R&D reliefs in 2020-21 is £1.13 billion, more than three times as much as the previously published estimate of £336 million.¹ The updated estimate is the result of HMRC putting in place a random enquiry programme.

2020-21 is the most recent year for which figures are available. HMRC point to action taken since to reduce error and fraud, the impact of which is not yet known.

Commenting on HMRC’s announcement, Ellen Milner, CIOT Director of Public Policy, said:

“These figures show that abuse of R&D relief is an even bigger problem than previously thought, and HMRC are right to be prioritising action to tackle it. However this action needs to be carefully targeted or it will risk holding back genuine R&D while allowing invalid claims through.

“At the moment we are continuing to receive large numbers of reports from our members about the difficulties being encountered by firms carrying out genuine R&D because of HMRC’s ‘volume compliance’ approach.² Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.

“We, and our members, want bad R&D claims rooted out, but as it stands, it appears that HMRC do not have the systems in place to differentiate good from bad. Too many genuine claimants are embroiled in a rigid and uncompromising compliance process in order to defend their R&D tax relief claim, and are reconsidering using the scheme altogether as the costs of enquiry outweigh the benefits of claiming the relief.

“We are keen to work with HMRC to improve compliance processes so that there is less of a collateral impact on genuine R&D claims, and the compliance processes support the policy objective of encouraging R&D. HMRC published their compliance approach to R&D tax reliefs,³ alongside the Annual Report and Accounts. This, and our conversations with HMRC, indicate that they also wish to move in the same direction. It is interesting to note that under 10% of claims examined in the random enquiry process indicated fraud. This indicates that most of the non-compliance is error, which suggests that better education and guidance is required. We are pleased to see that the actions proposed in HMRC’s compliance approach include this.

“Time will tell whether these actions will address the current issues and result in a fairer and more consistent treatment of taxpayers and agents.”

Notes for editors

1. HMRC’s Annual Report and Accounts, 2022 to 2023.
2. CIOT has shared with HMRC its members’ concerns around how HMRC are conducting R&D enquiries into claims by small and medium sized enterprises (SMEs), in a letter to the Director of Wealthy and Mid-Sized Business Compliance at HMRC. 
3. HMRC: Compliance approach to Research and Development tax reliefs.