Recommendation 2

HMRC does not understand the reasons for the growth in the cost of research and development tax reliefs including how much is due to abuse. The cost of research and development (R&D) tax reliefs has grown by 240% over the last four years, with claims exceeding forecasts. Over this period R&D expenditure used to claim reliefs has grown at a much faster rate than UK R&D expenditure reported by the Office for National Statistics. HMRC does not know why the cost of R&D tax reliefs has grown so much. Research and development reliefs are complex and open up opportunities for abuse. HMRC estimates error and fraud was £336 million in 2020–21, up £25 million from 2019–20. The C&AG considered the level of error and fraud estimated by HMRC to be material and qualified his regularity opinion in 2020–21 for the second year in a row. However, the actual level of error and fraud could be much bigger as HMRC’s estimates involve a considerable amount of judgement. HMRC needs a better understanding of the nature of error and fraud in R&D tax reliefs. It is planning to examine a random sample of claims to improve its 6 HMRC Performance in 2020–21 estimates of error and fraud and has increased the compliance resources it uses to check R&D relief claims. The government is planning to make changes to the reliefs with the aim of improving how they are targeted and protected from abuse. Recommendation: HMRC should, in its Treasury Minute response, set down: • how it will improve its understanding of the cost of research and development tax reliefs; and • the reduction in the level of error and fraud it is seeking together with how and when that will happen. This should include clear milestones for this Committee to monitor.