HMRC is currently moving some of its most experienced investigators into the Research and Development Anti Abuse Unit. The new team which was announced in the Autumn 2021 Budget will be scrutinising the Research & Development (R&D) claims submitted by both large and small companies. It was due to be operational by April 2023, but HMRC is accelerating this plan.
HMRC’s latest Annual accounts for the year ended 31 March 2022 highlights its continued concern with R&D claims. HMRC identified a pattern of irregular R&D claims in April 2022 which as well as precipitating the need for the new unit, led to additional measures to counter error and fraud in R&D claims including:
- Establishing a threat risk assessment process for all R&D claims.
- Implementing additional payment identification and verification controls for all R&D payments.
HMRC estimates that the total monetary value of the R&D expenditure that has been erroneously or fraudulently claimed during the financial year ended 31 March 2022 is £469m, which equates to 4.9% of total R&D tax relief expenditure for the financial year. HMRC’s accounts attribute £430m of monetary value to claims made by Small & Medium Enterprises.
As R&D claims made during the year ended 31 March 2022 still need to be processed and checked by HMRC, the estimate is based on its historic compliance activity. The accounts state that there is uncertainty in the estimates included in the account. However, HMRC views the irregular pattern in claims and the significant recent increase in the cost and take up of these reliefs in recent years as a potential threat to the Exchequer.
HMRC has commenced a wide range of compliance activities targeting both large and small companies to counter this tax risk.
One to Many (OTM) letters, often referred to as nudge letters, have been sent to businesses, asking them to check their R&D claims as HMRC has found that some businesses have made incorrect claims. A business in receipt of one of these letters faces the dilemma of potentially increased penalties if HMRC subsequently finds an inaccuracy in its R&D claim it has not disclosed.
From discussions with senior individuals within the R&D units, we are aware that there are around five different OTM campaigns being run currently, working through businesses by sector, size, and nature of expenditure. In some cases, these are accompanied by questionnaires to companies requesting information on their approach to R&D claims and whether it is in accordance with HMRC’s guidance. Companies will need to consider whether they need to review their R&D claims to protect their tax position, and in all cases, should carefully consider their response – these are not letters to simply ignore and file.
HMRC is also sending one to one enquiry letters checking companies’ R&D claims, and indeed some have been issued by HMRC’s Fraud Investigation Service, who normally deal with cases of suspected fraud and have the power to carry out criminal investigations.
The government announced in the Autumn 2021 budget that R&D tax reliefs would be reformed, with one of the intentions to improve compliance and counter abuse. The government is currently reviewing its tax and public spending policies following the reversal of the majority of the tax polices contained in the Fiscal Event of 23 September 2022. If R&D tax relief expenditure just so happens to be next in the firing line of spending cuts, then increasing the productivity and growth of the UK economy by innovation may be at risk.