Recommendation 7

Research and development tax reliefs are costly, prone to abuse and provide questionable benefit to the UK economy. The government has a target of 2.4% of GDP to be invested in research and development. In 2021–22, HMRC spent £9.5 billion on research and development reliefs, with expenditure having continued to grow year-on-year. HMRC told us that analysis it has undertaken demonstrates that these reliefs increase research and development investment, albeit marginally for small and medium-sized enterprises, but the benefit to the UK economy of that investment is not clear. Based on HMRC’s latest estimates, abuse of the reliefs cost the taxpayer £469 million in 2021–22, though work to establish the true scale of the problem remains ongoing. Abuse of the small and medium-sized scheme is particularly worrying, with 7.3% of claims for relief estimated to be fraudulent or erroneous. HMRC has undertaken work to reconcile the £21.6 billion gap 8 HMRC performance in 2021–22 between HM Treasury and Office for National Statistics estimates of research and development expenditure, but discrepancies remain. HMRC is introducing new measures from April 2023 to strengthen its compliance approach and bear down on abuse of the schemes. Recommendation: HMRC should develop its analysis of the additional research and development expenditure its relief schemes result in, to consider what impact that expenditure has on the UK economy. HMRC should report to the Committee on its findings within 12 months. HMRC performance in 2021–22 9 1 Managing error and fraud, compliance and tax avoidance