The cost of non-compliant R&D Tax claims has fallen 46% in two years.
In its annual report and accounts, HMRC estimated that error and fraud in claims filed in 2023-24 cost taxpayers £601 million, down from £1.13 billion in 2021-22.
The authority estimated that the cost of non-compliant SME claims fell from £1.2 billion to £475 million – a 60% reduction – and from £134 million to £125 million for RDEC claims.
While non-compliance is still too high, these figures show that HMRC’s compliance crackdown is working.
Inevitably, the government’s announcement of a £22 billion ‘hole’ in the nation’s finances has renewed calls for additional reform and even the scrapping of the R&D Tax scheme entirely.
This would be a huge mistake. Further change would create more uncertainty for businesses, while repealing the scheme entirely would deprive innovative companies of critical funding.
The Labour Party should keep its pledge of bringing consistency to R&D Tax Relief.
Instead of sweeping changes, the government should focus on supporting HMRC’s compliance efforts while minimising their impact on genuine claims.
How is the government tackling non-compliance?
The government has looked to reduce non-compliance in two ways: by introducing legislation and changing to the “compliance environment”, meaning how HMRC polices the scheme.
New legislation
Between 2021 and 2024, the previous government made a range of changes to R&D Tax Relief.
These changes include:
- Introducing the additional information form (AIF), making it easier for inspectors to spot high-risk claims
- Implementing the claim notification form for companies that haven’t claimed before or in the last three years
- Reintroducing the PAYE Cap for SME R&D Tax Relief claims
- Requiring all claims to be submitted digitally, allowing HMRC to assess risk more effectively
- Cutting SME R&D Tax Relief, making it less appealing to fraudsters
Changes to the compliance environment
HMRC has also changed its approach to identifying and deterring non-compliance.
Its tactics include:
- Increasing the number of enquiries by 1900%
- Doubling the number of tax professionals working on non-compliance
- Introducing a volume approach to compliance, targeting enquiries at companies that meet certain criteria, such as belonging to a generally non-qualifying industry
- Establishing an anti-abuse unit, which has already blocked £85 million of fraudulent claims
- Better educating businesses that are unlikely to qualify
- Working with R&D Tax consultants to improve standards
- Identifying and penalising consultants that promote non-compliance
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Controversy over HMRC’s approach
The cost of non-compliance has fallen dramatically.
However, some of HMRC’s tactics are negatively impacting qualifying businesses, with valid claims being rejected and startups being asked to pay back relief they’re entitled to.
Bodies such as the Chartered Institute of Taxation (CIOT) have criticised HMRC for:
- Its volume approach to compliance, where enquiries are targeted at companies from non or less-innovative industries
- A lack of training for tax inspectors conducting enquiries
- The Individual and Small Business Compliance unit’s (ISBC) predisposition to reject claims
- Removing claims from some companies’ tax returns without giving companies the option to prove their eligibility, which the CIOT says could “could amount to an abuse of power”
The CIOT warned that these aspects of HMRC’s approach are “undermining confidence in R&D tax relief” and deterring qualifying businesses from “claiming relief to which they are entitled.”
This defeats the very purpose of the R&D Tax Relief scheme: to reward and reduce the risk of innovation by providing funding.
Thankfully, HMRC has recognised the need to make changes and has committed to improving training for tax inspectors undertaking enquiries.
However, at the time of writing, some elements of HMRC’s approach remain problematic.
Protecting your company from HMRC’s compliance crackdown
According to HMRC’s Mandatory Random Enquiry Programme (MREP), which investigates a random sample of claims to extrapolate compliance scheme-wide, the vast majority of non-compliance happens by accident.
Most companies that file for ineligible costs and projects don’t realise they are doing so until they find themselves staring down the barrel of a long, gruelling enquiry.
The best way to ensure your claim is compliant and avoid a lengthy enquiry is to work with a highly experienced R&D Tax Relief specialist who prizes compliance.
With 14 years of experience preparing compliant claims and over £400 million in tax relief secured for our clients, GrantTree is the perfect partner for your upcoming R&D Tax Relief claim.
To learn more about our service or get started on your next claim, just get in touch. Our team is standing by to help you.
