HMRC has published new revised estimates and more detailed statistics on the level of 'error and fraud' in claims for research and development tax credits. Its latest analysis estimates that "the overall level of error and fraud for both reliefs [SME and RDEC] for 2020-21 is 16.7% (£1.13bn), which is significantly higher than the previously published estimate of 3.6% for 2020-21.
The majority of this non-compliance is in the SME scheme, where error and fraud for 2020-21 is estimated as 24.4%.
HMRC has completely overhauled the way it calculates these figures. They are now based on "international best practice" and include detailed post-payment analysis.
HMRC sets out all the actions it is taking to counter error and fraud in the report HMRC's approach to Research and Development tax reliefs including 300 new R&D staff and helping businesses get their claims right first time.
The department aims to "help protect businesses from unscrupulous agents who try to pressure them into making non-compliant historic claims" by introducing a range of new checks on claims from 1 August 2023 onwards. The Additional Information Form that claimants will have to submit is intended to allow HMRC to quickly assess the validity of any claim.
HMRC has also risk-profiled claims across the different business sectors and by size of claim. It estimates that only 11% of R&D claims made by businesses in the Education sector were compliant whereas 69% of claims made by Manufacturing sector businesses were compliant. Broadly, small value R&D claims are seen as less likely to be compliant: 78% of claims for less than £10,000 are suspected to be non-compliant.
Carrie Rutland, Innovation partner at BDO said: "These estimates reinforce what HMRC has long believed - that unless you are spending serious money on an R&D project, it is highly unlikely that you are doing qualifying R&D.
"HMRC predicts that by 2027 to 2028, the cost of relief for R&D claims will total £9.5 billion. Assuming that HMRC's actions do achieve a significant reduction in error and fraud, its own estimate shows that R&D relief will be making a significant financial contribution to businesses investing in R&D in future years.
"While there is going to be more red tape for compliant companies, planning R&D projects carefully as well as preparing for the new system and setting your business up to collect the right information as you go along will make the process manageable. In the long run, if HMRC's efforts to cut down on wastage of R&D reliefs are successful, the government should be able to increase support for businesses that make genuine claims.
"Any business that is facing an enquiry into their R&D claim should take expert advice from specialists in dealing with R&D investigations - these are serious matters that can have a wider impact on their relationship with HMRC."
For more information or advice, contact our BDO NI team: Claire McGuigan or Timothy Scott.