Recommendation 22

In 2021–22, HMRC granted research and development tax reliefs worth £9.5 billion.34 HMRC said the relief is an attractive target for abuse, whether by companies that have not carried out any research and development or by advisors encouraging companies to push the boundaries of what expenditure is eligible to be claimed for under the schemes.35 HMRC estimates that the level of fraud and error on research and development relief was £469 million, or 4.9%. This is an increase from 3.6% in 2020–21, although HMRC believes this is due to improvements in its methodology rather than non-compliance worsening.36 HM Treasury has found UK companies claimed tax relief on £47.5 billion of research and development expenditure in 2019, but the Office for National Statistics estimated that businesses only carried out £25.9 billion of privately financed research and development in the UK.37 HMRC has recently published a joint paper with the Office for National Statistics that explains some of this disparity, but HMRC said that it is still working to resolve the remaining gap.38 Some of the gap can be explained by tax relief funding research and development costs incurred outside of the UK. We asked HMRC whether this was a legitimate use of the funding. HMRC said that the objective of the relief schemes was to fund research and development that benefits the UK economy, and that it has made some reforms to the small and medium enterprise scheme that better targets research and development undertaken in the UK.39