HMRC scrutiny of RD tax relief claims could hamper growth plans

Innovation is crucial for long-term economic growth. The government has an ambitious target to raise investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs for UK businesses play a fundamental role in achieving this and the government is committed to creating an internationally competitive tax system, and ensuring strong, sustainable growth in a rapidly changing economic environment.

Most R&D tax relief claims are compliant and non-abusive. However, HMRC is under a significant amount of pressure from the government to better understand errors and fraud in R&D tax relief claims. As such, in recent months, it is becoming clear that HMRC’s gloves are off and they are increasing scrutiny of R&D claims. As a result, it has significantly increased the size of its R&D compliance team. With more resources and budget for compliance, and pressure to show they are taking action against boundary pushing and abuse, HMRC’s approach has understandably become much more proactive.

Whilst estimating the level of error and fraud will always be challenging for HMRC, HMRC’s current estimate of the level of R&D tax reliefs error and fraud for the 2021-22 tax year is £469m, i.e. 4.9% of the estimated total cost of the reliefs. However, the introduction of an R&D tax reliefs Mandatory Random Enquiry Programme (MREP) makes it clear that there is little trust in HMRC’s current estimate. As MREP is only targeted at SMEs, it is likely that this population of claimants will face an increase in enquiries at a time where these are the companies that need more support, and not time-consuming scrutiny.

Given the volume of R&D claims, HMRC will always face a trade-off between operating the regime efficiently and policing the accuracy of claims. However, even with the additional resource, HMRC is clearly playing catchup. The requirement coming into effect from 1 April 2023, for claims to be endorsed by a named senior company officer is intended to encourage better behaviours by ensuring a senior officer of the company takes responsibility for the content of the claim. Meanwhile, the requirement to provide details of any agent that has advised the company should help HMRC to assess the quality of advisers and identify higher risk claims. These measures clearly demonstrate HMRC is taking R&D tax reliefs fraud seriously.

Whilst clamping down on fraudulent claims is to be applauded, the lack of a more targeted approach from HMRC could disincentivise business from claiming R&D tax credits and work against the long-term goal of growing the economy.