HMRC's Response To R&D Tax Credit Fraud And Error

• Published date: 12 January 2024
• Subject Matter: Tax, Corporate Tax, Tax Authorities
• Law Firm: Price Bailey
• Author: Molly Rushworth

What is the problem?

R&D tax credit fraud was identified as a major concern in HMRC's latest annual report and accounts as the published figures for fraud and error in 2020-21 rose from its previous estimate of '336 million (3.6% of the total value claimed) to '1.13 billion (16.7%). HMRC's Chief Executive admitted that they underestimated the level of fraud and error within the R&D tax credit regime and have since implemented changes to address the issue.

In November 2022, it was acknowledged to the House of Lords that claims in 2022-23 so far were 'determined to be inaccurate in 84% of closed 1-2-1 enquiry cases in the SME R&D scheme. Of those R&D claims challenged and closed in 2022-23, the average additional amount due as a result of the inaccurate claim is '128,000.'

HMRC previously selected enquiry cases on a risk basis and made assumptions on the level of non-compliance in the remaining population of R&D claims. However, since undertaking random checks across the entire population of claims, HMRC discovered that the level of fraud and error was much higher than expected and nearly 50% of all R&D claims contained errors. As a result, HMRC have increasingly introduced more vigilant compliance checks, which are continuing to date.

How have HMRC responded to the issue?

• The 'merging' of the SME and RDEC R&D tax relief schemes for accounting periods beginning on or after 1 April 2024 announced in the Autumn Statement on 22 November 2023, should aid with preventing non-compliance by offering a simpler claim procedure.
• There has also been an increase in compliance checks with HMRC hiring 300 new inspectors to look solely at R&D tax relief claims.
• Alongside compliance checks, HMRC has strengthened their guidance to more clearly demonstrate...