Challenges against R&D claims are set to ‘intensify’ for businesses, after HMRC uncovered more than £1 billion of ‘fraud and error’.
A new report from HMRC has revealed £1.13 billion of fraud and error in research and development tax credits claimed by SMEs in 2020-21.
According to the report, the overall level of error and fraud for both R&D tax relief schemes (SME and RDEC) across all sectors of the economy was the equivalent to 16.7% of claims, significantly higher than HMRC’s previously published estimate of 3.6%.
Ross Northall, BDO partner and head of Innovation Taxes for the North, said: “This announcement will have a significant impact on businesses, particularly SMEs, as it cements HMRC’s stance on R&D claims and the level of challenge it’s prepared to undertake against potential fraud and error. What is clear is this level of scrutiny is not going to go away and will in fact intensify, as HMRC seeks to use newly introduced legislation to challenge claims.”
In August, tighter rules around R&D claims will come into force. Claimants or their R&D advisers will have to fill in an Additional Information Form which is designed to allow HMRC to quickly assess the validity of any claim and the level of expertise of any R&D agent used to prepare the claim. HMRC has also risk-profiled claims across the different business sectors and by size of claim.
Northall added: “Businesses will need to ensure more than ever that they are clearly demonstrating their qualifying activities to HMRC when submitting claims and, where they use professional advisors to support them in doing this, that they have the skills needed to provide high quality advice and support to these businesses.
“Failure to do so could result in HMRC opening enquiries that will prove expensive and time consuming to deal with. Should HMRC be successful in their challenge, it will also result in the denial of relief, potential penalties, and the possibility of HMRC also looking at earlier submitted claims, further compounding the problem.”
The figures come as the government unveiled draft legislation to change the UK R&D regime, with proposals to merge two schemes – the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.
The aim of the single R&D relief scheme is to achieve tax simplification, including having a single set of qualifying rules, particularly around subcontractor costs and in the restriction of claims where R&D work is deemed to be subsidised.
Northall warned that the changes could go ‘too far too fast’ if implemented from April 2024, hitting innovative businesses and creating more uncertainty. He said: “Following the review of R&D reliefs launched in Rishi Sunak’s 2021 Spring Budget, the government has taken many steps to reduce the costs of the UK’s R&D scheme to get better ‘value for money’ – while this is understandable, I’d argue that this latest move is going to prove the most disruptive yet.
“Given all the recent changes, creating yet more uncertainty by changing the R&D regime again for accounting periods beginning on or after April 2024 could risk turning innovative businesses away from investing in the UK.”
The current SME and Research & Development Expenditure Credit (RDEC) schemes offer different rates of relief with the SME scheme being more generous – even after the reductions in tax relief from 1 April 2023.
Northall continued: “Under the proposals, many start-up and growing businesses will be concerned that they will get even less tax relief under a combined scheme – although the higher relief for R&D intensive businesses looks set to continue – albeit running alongside the new scheme.
“Businesses understand that the government will move the goalposts to make it harder for fraudsters to win tax reliefs from HMRC. But, making radical changes to tax law at such short notice not only creates uncertainty for compliant businesses it also risks introducing new rules with loopholes that fraudsters can exploit further down the line.
“The government has not made a final decision to push these changes through from April 2024 and I believe the changes should be delayed until at least 2026 so that they don’t damage the R&D investment the relief is supposed to support.”
