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R&D tax relief – what are the odds?

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HMRC have published new data around Research and Development (R&D) tax reliefs and it makes for interesting reading. The headline is that HMRC now believe that £1.13 billion of R&D tax relief claims are wrong – these amounts are either claimed in error or claimed fraudulently. The original estimate for “error and fraud” was £336 million so there has been a three-fold increase in the size of the problem following this revision from HMRC.

These are big numbers but, in simple terms, it means that HMRC believe £1 out of every £6 claimed on R&D tax relief is incorrect.

One in six

This 1-in-6 number is important because it helps to quantify the problem in real terms. Faced with a £1.13 billion “error and fraud” black hole, there is not much a single HMRC Inspector can do. But armed with the knowledge that £1 in every £6 claimed on R&D is likely to be wrong, they can start to tackle the situation.

Imagine that an HMRC Inspector opens six enquiries into six equal-sized R&D tax relief claims, with the goal of identifying the £1 in every £6 that has been claimed incorrectly. The “error and fraud” isn’t likely to be spread evenly across those six enquiry cases, but the Inspector doesn’t know that for sure. They will have to conduct their enquiries over several months to satisfy themselves that the correct amount has been claimed. It might be that adjustments are necessary to the tax return, at which point HMRC will consider whether “reasonable care” was taken in the preparation of the claims and if penalties are appropriate.

Alternatively, the Inspector might single out one claim, from the six enquiries, and decide that it should be rejected in full. The notional 1-in-6 target has been met and penalties will almost certainly be applied if a claim is rejected in full.

In both cases, it will take a long time to resolve, and the enquiry could expand into other areas and become even more disruptive to your business.

Non-compliant claims

The HMRC report also identifies some key themes for claims that were either “wholly non-compliant” or “partially non-compliant”.

More than half (57%) of all R&D tax relief claims, where the company had spent less than £75,000 on R&D activity, were non-compliant.

While in three sectors, almost two-thirds of all claims were non-compliant. Those sectors are Arts & Entertainment (63% non-compliant), Construction (62% non-compliant) and Wholesale / Retail Trades (61% non-compliant).

Greater scrutiny

So what does this mean if you are making a claim for R&D tax relief? HMRC now have some key data they can use to drive their enquiries and target their compliance activity. They believe that the amount of error and fraud is much bigger than it was previously, and they also know which groups of claimants are likely to be submitting ‘non-compliant’ claims.

Every claimant should expect an increased level of scrutiny for their claim – and nothing should be taken for granted. Every year, each claim should be assessed on its individual merits, and all claimants should avoid being complacent, thinking that a previous claim has been “accepted” by HMRC so everything must be fine with the new one.

The HMRC document conclude “Reducing the level of non-compliance in R&D tax relief schemes is a priority for HMRC. HMRC will share a further update on this approach to improving compliance with R&D tax reliefs in Winter 2023”.

As mentioned above, these are big numbers, so HMRC will be under increasing political pressure to recoup some of the perceived losses. We haven’t heard the last on this from HMRC and can expect more scrutiny, more enquiries and tighter regulation over the coming months.

At BHP we’re here to guide you through this shifting landscape. We believe in honest, straightforward advice which can sometimes mean challenging whether the projects described actually constitute R&D within the guidelines. If we think you have a qualifying claim, we will support you to make it as robust as possible. But if not, we would rather tell you now than submit it and hope for the best.

For more information, please visit R&D / Patent Box – BHP, Chartered Accountants or call your designated BHP partner or James Clark, Associate Tax Director.