Research and development tax reliefs

HMRC’s continued drive to reduce non-compliance

Oli Clapp, Senior Manager, Corporate Tax

HMRC are proactively trying to reduce the level of non-compliance in Research and Development (R&D) tax reliefs.

On 17 July 2023 HMRC published its updated estimate of the level of error and fraud.

On 18 July 2023 draft legislation was also published outlining a new R&D tax credit scheme.

Error and fraud in the R&D scheme have been a focal point for HMRC and the government over the past few years due to the steep rise in claimants and totals claimed.

In 2015-16, 43,665 claims were made totalling £4 billion of relief. By 2020-21, the claims had exceeded double to 89,300, and relief totalled
£6.6 billion. Newspaper articles were released in 2022 which put a further spotlight on issues with the schemes, giving specific examples of misuse including the infamous “blueberry flavoured croissant” project that had been wrongly included in a claim. Committees and consultations have been setup to provide feedback and insight into the required direction of the schemes and potential improvements. This includes a widespread consultation between HMRC, HMT, and other key stakeholders beginning in January 2023, and a report on R&D reform by a sub-committee of the House of Lords Economics Affairs Committee.

HMRC has now undertaken their most detailed analysis to date of error and fraud in R&D tax reliefs. Updating their methodology for estimating the level of non-compliance, with their latest estimates for small and medium enterprises (SME), produced using a random enquiry programme. The updated estimate of the overall level of error and fraud for both reliefs for 2020-21 is now 16.7% (£1.13 billion), significantly higher than the previously published estimate of 3.6% (£336 million) for 2020-21.

Key findings in the report include:

the level of error and fraud in 2020 to 2021 is 24.4% (£1.04 billion) for the SME scheme, and 3.6% (£90 million) for the research and development expenditure credit (RDEC) scheme
smaller claims are more likely to be non-compliant. The proportion of SME claims with under £10,000 of R&D expenditure that were deemed non-compliant was 78%
HMRC found fraud indicators in under 10% of claims examined. Overclaiming the relief or technical misinterpretation of the R&D legislation being the most common causes of non-compliance
HMRC have highlighted certain sectors as being higher risk. Companies within the 'education' sectors saw the highest levels of non-compliance at 87%, and 'professional, scientific and technical activities' the lowest at 9%. Other sectors with high non-compliance were 'arts, entertainment and recreation' and 'wholesale and retail trade'
for first-time claimers the level of non-compliant R&D claims rises to 38%, from the 24% average across all SME claims.

Following the release of the above findings, HMRC published draft legislation on 18 July 2023 which outlined a proposed “merging” of the SME and RDEC R&D tax relief schemes to further prevent non-compliance, offer simplicity, and continue the re-balancing of SME and RDEC R&D tax reliefs. The draft legislation will now be consulted on, and a decision on whether the scheme will be merged, will be made at a future fiscal event.

The draft legislation published shows a continued attempt and focus by HMRC to combat error and fraud. Over the last three years, HMRC has more than doubled the number of people working on R&D compliance. This includes an extra 300 people tackling non-compliance. This increase in resource has been combined with the following policy changes:

Additional information requirement – supporting information is required to be submitted digitally to HMRC from 8 August 2023, allowing HMRC to more effectively risk assess.
Transparency of individuals/agent involved in preparation of a claim – requiring each claim to be supported by a named officer of the company, to help prevent claims being submitted without the company’s knowledge or understanding. As well as, requiring details of any agent associated with a claim.
Notification of intention to claim – for accounting periods beginning on or after 1 April 2023. Companies that have not made claims previously or within the last three years must now notify HMRC before submitting a claim. This notification must be made within six months prior to the period end. Limiting the ability of agents who facilitate false claims to do so for earlier years, where a company has correctly not previously claimed the relief. The notification process also allows HMRC to proactively reach out to customers who are new to R&D regimes, and to those in sectors where there are limited opportunities for businesses to make compliant claims.
PAYE cap for SME claims – reducing the amount of payable relief in the SME scheme to £20,000 plus 300% of the company’s PAYE NICs liability. With the aim of preventing offshore companies from artificially channelling activity through the UK to claim the relief.
SME rates reductions – as of April 2023, the rates of relief receivable under the SME scheme have reduced. The SME enhancement rate has decreased from 130% to 86% and the rate that taxable trading losses can be surrendered for a tax credit from 14.5% to 10%. These changes are offset by the increase in the corporation tax rates for profit-making SMEs, and therefore have the largest impact to companies in a loss-making position. SME’s with high intensity R&D, where qualifying R&D expenditure cover 40% or more of the company’s spending during a given period, remained at the 14.5% credit rate.

Crowe’s experienced R&D team would be delighted to start the conversation with you. Please contact Stuart Weekes or your usual Crowe contact.