91探花

The highlight the (original) urgent need to address non-compliance in research and development (R&D) tax relief claims, with an estimated error and fraud rate for R&D tax credits in 2021/22 being 17.6% overall, and an alarming 25.8% among claims by small and medium-sized enterprises (SMEs).

Whilst the focus on non-compliance is crucial for maintaining the integrity of the R&D tax relief system, several important questions arise regarding the impact of these measures on legitimate claims, particularly those from SMEs that may lack the resources to defend their claims against current levels of scrutiny. The stringent compliance checks, while effective in reducing fraud, may inadvertently discourage genuine claims, thereby stifling innovation and growth among smaller enterprises. Anecdotally, we have heard businesses suggesting they will be reconsidering their appetite and approach to future R&D, or alternatively move R&D activity outside of the UK.

Moreover, the statistics reveal a stark contrast in compliance rates based on the size of the claim. For claims exceeding £1m, 75% were found to be fully compliant, mirroring the 74% compliance rate reported in the first Mandatory Random Enquiry Programme. However, for smaller claims under £1m, compliance rates varied dramatically between 29% and 58%. This discrepancy underscores the financial and administrative burdens faced by smaller firms, which can often lead to the abandonment of legitimate claims due to the high costs associated with defending them. This is frequently due to the inefficient HMRC enquiry process, which can lack engagement with the facts of a claim and retains a blinkered approach to rejection.

However, HMRC’s “volume compliance” approach is clearly generating results with the data showing progress in reducing error and fraud rates – down to an estimated 14.6% for SMEs in 2023/24. All the reduction is presented as removing error and fraud, which experience tells us may not be the case, as this will include legitimate claims that have been abandoned due to the commercial impact of continuing to contest them. Arguably this variance in definition could be significantly affecting the conclusions drawn and as a result, how HMRC devotes its resource – i.e. at its extreme, changing the conclusion from ‘successfully driving out fraud’ to ‘blocking genuine claims through a flawed enquiry process’. 

Very noticeably, the “volume compliance” approach has led to an increase in the number of taxpayers disputing HMRC’s view and conclusion via statutory reviews, an “independent” review conducted by HMRC that should be completed in 45 days and is currently taking more than 150 days. All of which adds to the frustration and cost to the claimant.

In 2023/24, the report shows there were 822 requests for statutory review, and of these, 251 were concluded (highlighting the delay in this process), with 214 being in HMRC’s favour, and fewer than 5 resulting in HMRC’s decision being cancelled. This does beg the question of how independent the review is, or possibly more likely, do the reviewers have sufficient R&D knowledge to successfully challenge the enquiry conclusions? Our own experience confirms that this is not always the case, leading to the rubber stamping of flawed decisions – potentially because the system, which was only designed and resourced to be used in a minority of exceptional cases, is now being used as simply the ‘next step’ in an enquiry process flawed from the outset. 

The number of complaints increased from 212 in 2022/23 to 423 in 2023/24, with roughly half being upheld. A significant number, which again raises the question of the quality of the enquiry process being followed by the HMRC R&D compliance teams. It would appear for HMRC, the end justifies the means, and the collateral damage inflicted on the legitimate claimants is a small price to pay for the significant reduction in the error or fraud rate.

Ultimately, while the drive to tackle non-compliance is essential, and supported, it must be balanced with fair and transparent practices that support legitimate claims. The integrity of the data and the methodologies employed by HMRC need careful examination to ensure that they do not inadvertently hinder the very innovation that R&D tax reliefs are designed to foster.