HMRC's response to R&D Tax Credit Fraud and Error
R&D Tax Credit’s in the UK are a government incentive designed to encourage companies to invest in innovation. The program aims to support and reward businesses that engage in qualifying R&D activities by providing them with a reduction in their tax liability or a cash payment.
To be eligible for R&D tax credits, a company must be engaged in activities that seek to achieve a scientific or technological advancement. It’s important for businesses to carefully review the specific eligibility criteria and rules outlined by HMRC to ensure compliance with the regulations and maximise the benefit of the R&D tax credit scheme.
R&D tax credit fraud was identified as a major concern in HMRC’s latest annual report and accounts as the published figures for fraud and error in 2020-21 rose from its previous estimate of £336 million to £1.13 billion (Mondaq.com). HMRC’s Chief Executive admitted that they underestimated the level of fraud and error within the R&D tax credit regime and have now implemented changes to address the issue.
HMRC previously selected enquiry cases on a risk basis and made assumptions on the level of non-compliance in the remaining population of R&D claims. However, since undertaking random checks across the entire population of claims, HMRC discovered that the level of fraud and error was much higher than expected and nearly 50% of all R&D claims contained errors. As a result, from this HMRC have increasingly introduced more vigilant compliance checks, which are continuing to date.
There have been several responses from HMRC including the merging of the SME and RDEC R&D tax relief schemes for accounting periods beginning on or after 1 April 2024. There has been an increase in compliance checks with around 300 new inspectors employed to look solely at R&D tax relief claims. Alongside the compliance checks, HMRC has strengthened their guidance to demonstrate between eligible and non-eligible R&D activities more clearly.
New regulations were introduced in 2023, concerning how companies make an R&D claim. For all claims made from 8th August 2023 companies are required to submit an additional information form before filing the company’s corporation tax return.
With hindsight the indication seems that previous HMRC compliance checks weren’t robust enough to prevent the levels of fraud and error they experienced. Based on those figures its unsurprising of the changes implemented to combat further fraud.
For advice and guidance on claiming for your research and development contact the Momentum Group today, as your specialist R&D tax credit consultant.