For a number of years now, there has been real concern over abuse and boundary-pushing involving R&D tax relief, particularly amongst SMEs. 

Our view, and that of the professional bodies, has been that HMRC hasn’t carried out sufficient checks, allowing the vast majority of claims to be paid out without any detailed examination. The rapid growth in companies claiming R&D tax relief, combined with an environment where HMRC was not effectively policing the regimes, led to an explosion in R&D agents. This agent population is diverse, with a range of capability and intent, and whilst reputable, professional agents share HMRC’s goal of improving the quality of advice on R&D, HMRC acknowledge there are many agents who seek to abuse the R&D reliefs.

In recognition of this, HMRC introduced a mandatory random enquiry programme (MREP) for SMEs claiming under the SME scheme or RDEC to better understand levels of non-compliance. This was based on claims submitted for 2020/21 and involved taking a random sample of 500 claims to more accurately estimate levels of non-compliance. The results of this have laid bare the scale of the problem. Some of the estimates coming from the MREP include:

• around half of all claims, by volume, contained at least some element of error or fraud;
• a quarter (25%) of claims were fully disallowed as no qualifying R&D activity had taken place;
• in 19% of cases, qualifying R&D activity was being undertaken, but companies had overclaimed the relief; and
• in the smallest claims, where expenditure was less than £10,000, over 75% of the claims were non-compliant.  This proportion rose to 90% for those claims prepared with an R&D agent.

This level of non-compliance is incredibly concerning, but sadly does not come as a complete surprise having seen the approach taken by some R&D agents. In light of these challenges, we are pleased to see HMRC ramping up its focus on compliance in R&D tax relief. But the concern is that the pendulum has swung too far and the approach now emerging could discourage genuine R&D claimants from accessing the relief. 

The Chartered Institute of Tax (CIOT) has written to HMRC setting out some of these concerns, much of which relate to HMRC’s new “volume compliance” approach. More on that later, but first it’s worth noting that the MREP was based on claims submitted for 2020/21 - there have been significant reforms since then and more currently being introduced, that are intended to reduce non-compliance. These reforms have not yet had chance to take effect. For example, over the last three years, HMRC has more than doubled the number of people working on R&D compliance (an extra 300 people). As part of this, in July 2022, a dedicated R&D Anti-Abuse Unit was created to tackle incorrect claims and open enquiries into the most complex cases. In addition to increased resource for HMRC, the Government has announced new policy measures to counter non-compliance, including: 

• requiring details of any agent associated with a claim, so HMRC can move quickly to target those agents who promote and submit non-compliant claims;
• requiring each claim to be accompanied by additional information so HMRC can better identify and target higher-risk claims; and
• requiring each claim to be supported by a named officer of the company to help prevent claims being submitted without the company’s knowledge or understanding.

However, the most controversial development in HMRC’s policing of the R&D tax reliefs relates to the “volume compliance approach” referred to above. This involves a much higher frequency of challenge, using standardised letters with little or no opportunity for companies or their agents to engage in conversation with HMRC, either in person, on a call or virtually, to explain their R&D activity. This approach is being handled by a team within HMRC’s Individual and Small Business Compliance (ISBC) unit, one of HMRC’s Campaigns and Projects teams. The approach being taken has been the subject of significant criticism, with the CIOT having written to HMRC explaining that it is leading to a breakdown of goodwill and trust between HMRC, taxpayers and their agents. The sheer number of enquiries being opened means that many genuine claimants are embroiled in a rigid and uncompromising compliance process in order to defend their R&D tax relief claim and are reconsidering using the scheme altogether as the costs of enquiry outweigh the benefits of claiming the relief. Concerns have also been raised about HMRC attempting to apply penalties in cases where they determine that R&D has not taken place, in situations that are not in line with established law around penalties, or their own guidance.  

Due to the complex nature of R&D tax relief and the technical considerations required in ascertaining the boundaries of qualifying R&D projects, calls or meetings involving the companies technical experts who were involved in the projects are often the most efficient way to review the projects, discuss and agree the boundaries of R&D activity and identify any areas of genuine disagreement. However, there is no facility for this in the ISBC volume compliance approach. HMRC has acknowledged that there are problems with its volume compliance approach, some of which it puts down to training needs, but (so far at least) appears committed to it, considering a large scale approach is necessary for a large scale problem.

In the meantime, companies should be encouraged to continue to make genuine R&D claims using reputable professional agents. With the introduction on 8 August of the requirement to identify the R&D agent involved in preparing claims, we hope that HMRC will be better able to target its efforts on those who promote and submit non-compliant claims and to ensure that the pain is felt most where needed.

Get in touch

If you have any queries or would like more information on R&D claims, get in touch with me, or another member of our Innovation Taxes team.