You may have seen that the R&D tax relief schemes have been hitting the headlines again this week. There has also been a flurry of activity and information from HMRC that you may not be aware of. So, I thought I’d take this opportunity to run you through it, explain what it means for the future of the schemes and what our, GovGrant , opinion is.
Sunday Times article “Start-ups under threat as taxman grabs R&D credits”
Published on 16 July 2023, this article outlined the experiences of several SMEs who had fallen foul of HMRC’s clampdown on R&D tax credit claims. The sense was that HMRC was overreaching, overreacting and setting small businesses up to fail.
The R&D tax relief schemes were set up to promote growth, through incentivising R&D and it is clear that the current scrutiny is impacting business confidence. For small businesses, the risk of an enquiry process renders the benefit of the scheme redundant as it is too time consuming and costly to defend even when there is clear compliant activity.
GovGrant has consistently voiced concerns (including to HMRC and the government more generally) that the policy direction and HMRCs approach to enquiries has grave consequences for any small business carrying out compliant R&D and who rely on the tax relief to continue their innovation.
We will continue to make this point and support innovative SMEs. In the meantime, any of our clients can be sure that we are confident in any claim reports we have prepared on their behalf, and if they face an HMRC enquiry we will defend it free of charge.
HMRC publishes a new estimate of error and fraud for R&D tax relief
On 17 July HMRC published its Annual Report and Accounts for 2022-23 which includes new estimates for the level of non-compliance in R&D tax relief. To be clear, we whole-heartedly support the eradication of any abuse of the schemes and support a scheme that provides good value for money to the taxpayer.
The new estimate for the overall level of error and fraud for both R&D tax relief schemes for 2020-21 is 16.7% (£1.13bn), which is significantly higher than the previously published estimate of 3.6% (£336m) for 2020-21. The updated estimate for the 2020 to 2021 level of non-compliance in the SME scheme is 24.4% (£1.04 billion), higher than the previously published 5.5%.
But taking a step back, where has this new number come from? There’s no good policy without having a good understanding of the evidence base. You also can’t evaluate your policy measures effectively without being honest with the numbers.
What level of statistical confidence is HMRC working to? The sample size here was only 0.56% of the total number of claims, for perspective there were ~90,000 claims made in 2020-21. Basing the levels of error and fraud of the whole system on 500 claims is a very small number on which to base a very big statement.
We believe this estimate is being used to justify new policy and changes to the scheme – the data has been made to fit the policy rather than vice versa.
There have been concerns about fraud and poor practice for a long time and we certainly feel like HMRC has been asleep at the wheel. We, alongside other reputable advisors, have been calling for better policing of the schemes and calling out malpractice through advertising standards. We have been largely ignored.
However, this new estimate shouldn’t impact any GovGrant clients directly… HMRC state that “the agent population is diverse, with a range of capability and intent”. Our motivation has always been to protect the integrity of the schemes.
It is good news that decisive action will be taken against those who seek to abuse the system. But again, we are astonished that it has taken so long for this to be made explicit and become part of HMRCs approach.
The Times article “Quarter of R&D tax relief scheme payouts have gone missing, HMRC says”
HMRC’s new estimates for the level of non-compliance in R&D tax relief was reported in The Times on 18 July. It follows a series of reporting over recent months casting doubt over the R&D scheme and the level of fraud that is happening in this one, specific, area of taxation. Again, this article is written in such a way to suggest that £1 in every £4 was stolen from the taxpayer.
There was no questioning from the Times on the veracity of HMRC numbers. But more than that, HMRC found fraud indicators in fewer than 10% of claims examined and these claims accounted for less than 5% of the total value claimed. There is no information on the reasons behind the non-compliance found in the other 90% of sample claims, and until we have that detail, we find this article wholly misleading and is clearly intended to support that publication’s narrative.
HMRC publishes new, draft legislation – including a single R&D scheme option
On 18 July, HMRC published draft legislation on the proposed design of a merged scheme for technical consultation. The timing of this was driven by the consideration that this could be applied from April 2024. The final decision on whether to merge schemes will be made at a future fiscal event, an Autumn Budget perhaps?
The draft legislation establishes a single R&D relief, delivered as an expenditure credit. However, it will differ from the current RDEC in several respects, most notably that companies will generally be able to claim for payments made as part of an R&D project to subcontractors.
They also provide more detail around the loss-making SMEs that have a high Research and Development intensity.
We will of course keep a close eye on these developments and respond to the technical consultation – it’s our core business and this is where we bring our expertise and experience to bear . Any GovGrant client should be confident that any R&D claim report that we prepare will be robust and compliant with any changes in legislation. It highlights the importance for specialist R&D advice in rapidly changing and uncertain times.