Source · Select Committees · Public Accounts Committee
Recommendation 15
15
Accepted
HMRC significantly underestimated R&D tax relief error and fraud, now estimated at £1.13 billion.
Conclusion
HMRC administers two research and development relief schemes to support companies that work on innovative projects in science and technology, one for large companies and one for small- and medium-sized enterprises (SMEs). In 2022–23, businesses claimed research and development tax reliefs worth £10.2 billion.51 HMRC has previously told the Committee that the reliefs are an attractive target for abuse by companies that have not carried out any research and development or by advisors pushing the boundaries of what is eligible to be claimed.52 However, HMRC has previously underestimated the level of error and fraud in these schemes and in 2022–23 used the results of a mandatory random enquiry programme (MREP) for the first time to calculate its estimate of error and fraud. HMRC estimated the level of error and fraud in 2022–23 was £1.1 billion, or 13.3% of related expenditure. HMRC also used the results of the MREP to revise its estimate of error and fraud in 2020–21 up from £336 million (3.6%) to £1.13 billion (16.7%).53 HMRC did not restate its estimate for 2019–20 or 2021–22, but told us that it is reasonable to assume that the actual level of error and fraud in those years was significantly higher than it had estimated.54 For the SME scheme, HMRC has found 24.4% of the value of claims in 2020–21 were non-compliant, with around two-fifths of these (10% of all claims) showing indicators of fraud rather than resulting from error.55 HMRC said that it expects claimants to correct previous years’ claims where fraud or error has been identified through its compliance activity.56
Government Response Summary
The government agrees with the committee's observation and is implementing several measures by Summer 2024, including new electronic claim requirements, increased R&D compliance staff to over 500, establishment of an Anti-Abuse Unit, and the launch of an R&D Disclosure Facility in Spring 2024 to tackle non-compliance.
Government Response
Accepted
HM Government
Accepted
5.1 The government agrees with the Committee’s recommendation. Target implementation date: Summer 2024 5.2 HMRC seeks to recover research and development (R&D) tax relief where it was not claimed in accordance with the law. All claims go through a risk screening process; new requirements to submit claims electronically and provide additional information will enable HMRC to risk assess large volumes of claims in an automated way and target interventions on higher-risk claims. 5.3 HMRC opens enquiries within legislative time limits. In the majority of cases, adjustments for incorrect R&D claims will be limited to claims investigated within the normal time limit of 12 months from the date the claim is submitted. However, HMRC does consider raising assessments outside of this normal time limit where relevant legislative conditions are met, including where there is evidence of deliberate non-compliance. Where there is evidence of deliberate non-compliance HMRC can look back up to 20 years to address this. 5.4 HMRC has increased its resources addressing non-compliance in R&D. Currently over 500 people work on R&D compliance, compared with around 100 in 2020-21. HMRC has also created an Anti-Abuse Unit (AAU), undertaking compliance activity where there is suspected abuse of the relief. This sits alongside work done by HMRC’s Fraud Investigation Service, where HMRC suspects criminality. 5.5 In spring 2024, the HMRC R&D Disclosure Facility will go live on GOV.UK, enabling customers or agents to inform HMRC if they may have overclaimed, or claimed in error and are out of time to amend their tax return. This will give customers the opportunity to come forward and put things right themselves rather than awaiting HMRC intervention.