In the world of R&D tax relief, recent events have garnered significant attention, with HMRC actively sharing updates and information that may have escaped notice. In this article, we will delve into these developments, analyse their implications for the future of R&D tax relief schemes, and provide insights into what we are doing here at RDI in order to combat fraudulent activity within the R&D marketplace.

In a recent Sunday Times article: "Start-ups under threat as taxman grabs R&D credits"

On 16 July 2023, the Sunday Times featured a piece highlighting the experiences of several SMEs entangled in HMRC's recent scrutiny of R&D tax credit claims. The article raised concerns that HMRC's approach might be perceived as overreaching and burdensome for small businesses.

While R&D tax relief schemes were designed to promote growth through incentivising Research and Development, the current scrutiny has resulted in diminished business confidence. For small enterprises, the risk of facing an enquiry process can sometimes outweigh the benefits of the scheme due to its potentially time-consuming and costly nature, even when R&D activities are compliant.

Here, at RDI, we have consistently voiced concerns, directing feedback to HMRC and the government at large, about the potential consequences for compliant SMEs that rely on the tax relief to sustain their innovation. We are committed to supporting innovative SMEs, ensuring our clients are confident in the accuracy of their claim reports, and offering free defense, as standard, against HMRC enquiries if required.

HMRC's Estimate of Error and Fraud for R&D Tax Relief

In HMRC's Annual Report and Accounts for 2022-23, released on 17 July, new estimates for non-compliance in R&D tax relief were disclosed. While the eradication of abuse within the scheme is undeniably essential, ensuring a scheme that provides value for money to taxpayers remains a paramount goal.

The updated estimate for the overall level of error and fraud in both R&D tax relief schemes for 2020-21 is 16.7% (£1.13bn), significantly higher than the previous estimate of 3.6% (£336m). Similarly, the updated estimate for non-compliance in the SME scheme for 2020-21 is 24.4% (£1.04 billion), surpassing the previous estimate of 5.5%.

Critically analysing the basis of this new estimation raises questions about its validity. Relying on data from 'high-risk' claims may lead to an inflated estimate when applied to the entire scheme. Additionally, the sample size used for estimation constitutes only 0.56% of the total number of claims made in 2020-21, rendering it statistically limited.

RDI believes this estimate may be used to justify new policy measures and scheme changes, with data possibly tailored to fit the policy rather than vice versa. As reputable advisors, we have long advocated for improved policing of the schemes and exposing malpractice through advertising standards. It is encouraging to see decisive action against those who seek to abuse the system, though the time taken to address these issues is a cause for bafflement.

Recently, in the The Times: “Quarter of R&D tax relief scheme payouts have gone missing, HMRC says”

The Times reported HMRC's new non-compliance estimates for R&D tax relief on 18 July, following a series of articles that have cast doubts on the scheme's integrity and level of fraud in the realm of taxation. However, the article's tone suggests that £1 in every £4 was stolen from the taxpayer.

It is essential to clarify that HMRC found fraud indicators in fewer than 10% of claims examined, accounting for less than 5% of the total value claimed. The reasons behind non-compliance in the remaining 90% of sample claims were not disclosed, making this article potentially misleading. As we await further details, it is crucial to refrain from hasty judgments and maintain a comprehensive understanding of the situation.

HMRC's New Draft Legislation – This includes a Single R&D Scheme Option

On 18 July, HMRC released draft legislation regarding the proposed design of a merged scheme for technical consultation. Although its implementation could begin in April 2024, the final decision on merging schemes awaits a future fiscal event, possibly an Autumn Budget.

The draft legislation establishes a single R&D relief, delivered as an expenditure credit, distinguishing it from the current RDEC scheme. Notably, companies may generally claim for payments made to subcontractors as part of an R&D project. The legislation also offers more detail on loss-making SMEs with high Research and Development intensity.

Here, at RDI, we will vigilantly monitor these developments and provide responses to the technical consultation, drawing on our core expertise and experience.

Clients can rest assured that any R&D claim report prepared by RDI Solutions will remain robust and compliant with any changes in legislation. The dynamic and uncertain times underscore the significance of specialised R&D advice to navigate through evolving circumstances.