HMRC's response to R&D Tax Credit Fraud and Error

What is the problem?

R&D tax credit fraud was identified as a major concern in HMRC’s latest annual report and accounts as the published figures for fraud and error in 2020-21 rose from its previous estimate of £336 million (3.6% of the total value claimed) to £1.13 billion (16.7%).

HMRC’s Chief Executive admitted that they underestimated the level of fraud and error within the R&D tax credit regime and have since implemented changes to address the issue.

In November 2022, it was acknowledged to the House of Lords that claims in 2022-23 so far were ‘determined to be inaccurate in 84% of closed 1-2-1 enquiry cases in the SME R&D scheme. Of those R&D claims challenged and closed in 2022-23, the average additional amount due as a result of the inaccurate claim is £128,000.’

HMRC previously selected enquiry cases on a risk basis and made assumptions on the level of non-compliance in the remaining population of R&D claims. However, since undertaking random checks across the entire population of claims, HMRC discovered that the level of fraud and error was much higher than expected and nearly 50% of all R&D claims contained errors. As a result, HMRC have increasingly introduced more vigilant compliance checks, which are continuing to date.

How have HMRC responded to the issue?

  • The ‘merging’ of the SME and RDEC R&D tax relief schemes for accounting periods beginning on or after 1 April 2024, announced in the Autumn Statement on 22 November 2023, should aid with preventing non-compliance by offering a simpler claim procedure.
  • There has also been an increase in compliance checks with HMRC hiring 300 new inspectors to look solely at R&D tax relief claims.
  • Alongside compliance checks, HMRC has strengthened their guidance to more clearly demonstrate eligible and non-eligible R&D activities.

In addition, new regulations were introduced in 2023 concerning how companies make an R&D claim. For all claims made from 8 August 2023, companies are required to submit an additional information form before filing the company’s corporation tax return.

Also, companies who are making a claim for the first time, or after 3 years of making an earlier R&D claim, must notify HMRC that they are making a claim for accounting periods beginning on or after 1 April 2023 within 6 months of the end of that accounting period.

With hindsight, it seems likely that previous HMRC compliance checks were not robust enough to prevent or detect the actual level of fraud in R&D claims. The recently published figures for R&D claim fraud are therefore perhaps unsurprising and many of the changes to the R&D legislation and HMRC’s approach were anticipated, albeit causing significant disruption to claimants. We expect that HMRC will be much more thorough over the next few years in their scrutiny of claims and businesses seeking to claim R&D tax reliefs should ensure they understand their obligations and keep abreast of any changes to the schemes.

If you need any further guidance on these changes or advice as to how any of the above may affect your business, use the form below to contact one of our R&D tax experts.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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