The industry was able to breathe a collective sigh of relief on Wednesday when it was confirmed that existing rates of relief will remain unchanged for the duration of this Parliament. Designed to encourage private sector investment in innovative science and technology projects, R&D Tax reliefs play a crucial role in promoting economic growth. However, with increasing concerns about non-compliance, HMRC is now focusing on ensuring that these incentives are effectively targeted while minimising misuse.
Recent reports indicate a concerning decline in R&D claims, which dropped from 83,240 in 2021-2022 to just 65,690 in 2022-2023, particularly among small and medium-sized enterprises (SMEs). This significant decrease raises alarms within the sector, as HMRC’s error and fraud estimates for 2021-2022 suggest that £1.3 billion—or 17.6% of claims—were linked to non-compliance, with 25.8% of SME claims containing errors. To address these issues, HMRC has introduced the Mandatory Random Enquiry Programme (MREP) to gain better insight into the nature of non-compliance.
Encouragingly, recent analysis indicates that error and fraud estimates have fallen to 7.8% for 2023-2024, suggesting that recent policy changes are beginning to mitigate non-compliance in R&D tax relief claims. HMRC has also implemented educational campaigns aimed at businesses that are at higher risk of making incorrect claims, specifically targeting sectors where R&D is rarely conducted, such as care homes, childcare providers, personal trainers, wholesalers, retailers, pubs, and restaurants. These initiatives aim to protect businesses from unqualified advisors.
With over 500 staff now dedicated to R&D compliance—up from just 100 in 2020-2021—HMRC has adopted a targeted, risk-based approach to compliance checks, particularly for claims made by SMEs, who face higher rates of error and fraud. In fact, HMRC has increased its compliance coverage to 17% in 2023-2024, conducting checks on 9,700 claims.
Additionally, the government plans to boost capital investment by over £100 billion over the next five years, focusing on transport, housing, and research and development (R&D). This initiative aims to deliver greater value for money and drive long-term growth.
Furthermore, the government is committed to safeguarding core R&D budgets by increasing funding for the National Institute for Health and Care Research in real terms. This support will not only benefit the NHS and wider health and care system but will also stimulate advances in research, life sciences, med tech, and data, strengthening the UK’s clinical trial network and improving patient outcomes while enhancing the investment environment for life sciences.
Looking ahead, a new R&D-related consultation is expected to take place in the Spring, focusing on whether the concept of Advance Assurance could be broadened and utilised more widely. We are also awaiting the outcomes of a consultation aimed at raising standards in the tax advisory market. The results could be significant, particularly if they indicate HMRC’s intention to limit the provision of R&D tax relief advice to those regulated by professional bodies, thereby tightening compliance requirements.
In summary, while the headline confirms that the R&D schemes remain unchanged, the reality is that the landscape of R&D tax relief is gradually evolving. Companies should remain informed and vigilant, ensuring they navigate this complex terrain carefully and avoid the pitfalls of non-compliance as they pursue innovation in the UK.
Read more about the Autumn Budget 2024 here
