In a report published alongside its annual report and accounts for 2022-23, HMRC also noted the smallest claims had the highest value of non-compliance and confirmed compliance behaviour varied according to industry sector.
HMRC’s paper highlights the significant rise in the number and value of claims for R&D tax relief and credits in recent years. Claims increased from 43,665 in 2015/16 (worth £4bn) to 89,300 in 2020/21 (worth £6.6bn). HMRC expects the cost of reliefs claimed in 2027/28 to total £9.5bn.
As a result of this rapid expansion in claims, HMRC has shifted its methodology in dealing with them. It has doubled the number of staff working on R&D compliance, including an additional 300 tackling non-compliance. It introduced a dedicated R&D Anti-Abuse Unit in July 2022 and has introduced several “upstream” activities such as nudge letters to encourage compliance in advance of company tax filings.
It has also introduced a mandatory random enquiry programme (MREP) for SMEs claiming under the SME or R&D expenditure credit (RDEC) regimes. This has allowed HMRC to better assess the level of compliance present in the regimes in the 2020/21 tax year. It estimates that the overall level of error and fraud in that year was 16.7% (£1.13bn), compared to its previous estimate of 3.6% (£336m).
According to its own figures, around half of all claims, by volume, contained at least some element of non-compliance. HMRC found fraud indicators in fewer than 10% of claims, which suggests that most non-compliance is down to other behaviours. Other key findings from those figures include:
- 25% of claims were fully disallowed on the basis that no qualifying R&D took place.
- 19% of claims included an overclaim of relief, although R&D activity was found to be present.
- 2% of cases included a genuine claim but also a technical misinterpretation of the R&D legislation.
The highest level of non-compliance of any kind was in smaller claims. In claims containing R&D expenditure of less than £10,000, the total monetary impact of error/fraud/non-compliance across all claims in that bracket equated to 78% of relief claimed. This contrasts with a figure of 13% for claims with expenditure exceeding £1m.
Some commentators have questioned the accuracy of HMRC’s figures following its change in approach. It has been widely reported that some claimants have decided that the time and costs involved with defending a claim outweigh the benefits. Although these may be entirely justified claims, they will be recorded by HMRC as an error. This may go some way to explaining the apparent higher levels of non-compliance associated with smaller claims in HMRC’s figures.
There was a wide variety in compliance according to industry sector. Education, arts/entertainment, and construction saw 11%, 38%, and 38% compliant claims respectively. By contrast, public administration and defence had 75% compliance.
New claimants showed a lower level of compliance (43%) than those companies that had claimed before (52%).
Perhaps of greatest concern is that the value of non-compliance as a percentage of claim value was marginally higher in those cases where a specialist R&D agent was involved (25%), compared to those without an identified R&D agent (24%). However, among the smallest claims (expenditure below £10,000) the relevant percentages were 90% and 74% respectively.
The report sets out a number of strategies that HMRC plans to adopt to tackle this level of non-compliance. It believes that the additional information form that must be completed for all claims submitted on or after 1 August 2023 will enhance its ability to risk assess claims and obtain more details on R&D activity and agent behaviour. It will also work directly with industry, representative bodies, and agents to better refine its approach.
It will be providing a further update on this approach as part of its formal response to the Public Accounts Committee and announce any further changes at a future fiscal event.
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