R&D – still changing after all these years
R&D reliefs predicted to cost over £9bn by 2026-27 – by far the largest corporation tax relief
Fraud and error in schemes total over £1.1bn in last three years
R&D ‘claims farms’ continue to hard sell opportunities to claim refunds on expenditure that often does not qualify
Impact of changes to help tackle problem R&D claims firms not felt for another two years
HMRC not resourced to tackle historical incorrect claims
A new report by TaxWatch shows that R&D tax reliefs, by far the largest corporate tax relief, are not working as intended, while being subject to hundreds of millions of pounds a year in fraud and error. The last three years alone saw £1.1bn in fraud and error (21-22 £469m, 20-21 £336m, 19-20 £311m).
New measures introduced in the Autumn budget won’t be felt for nearly another two years, and do nothing to claw back the billions already lost. The lack of resourcing at HMRC means that historic fraud will effectively be forgotten about.
Boundary pushing is rife with unregulated advisers encouraging borderline fraudulent behaviour, while skimming off the top. Multiple R&D claims advisers are still advertising jobs for sales advisers to cold call businesses persuading them to make claims, while industry insiders believe that it is a saturated market and that most new claims are unlikely to be eligible.
Our research suggests that the reliefs aren’t always acting as intended. Many companies are only applying for the relief after being contacted by tax advisers, suggesting the work would have been carried out regardless of the relief.
It’s unclear if this money is going to “innovative projects in science and technology”. The ‘Financial and Insurance’ sector made 1,445 claims in 2021 on a spend of £2.59bn, averaging £1.8m per claim – likely a result of the huge salaries paid in finance. ‘Admin and Support Services’ made 5,015 claims that year, on a spend of £1.33bn – that’s a whole lot of innovation in admin.
The historically low level of HMRC compliance activity in R&D is a good example of how failing to take timely action results in increasing abuse as people become more confident in their ability to get away with it.
Issues around R&D tax relief seem likely to appear again in the Spring Statement but will the Chancellor fully tackle this ongoing problem?
Alex Dunnagan, Director at TaxWatch, said:
The changes we saw in the Autumn Statement should help clamp down on future abuse, but the fact is that these amendments do nothing to tackle the billions previously lost to fraud and error.
With such great returns on investment for HMRC compliance activity, it’s a no brainer that they should be properly resourced to pursue historical abuse
Given the huge sums of money available for R&D reliefs, it’s no surprise that an entire industry of advisers has appeared, with many encouraging companies to submit boundary pushing claims.
The Government needs to decide whether the relatively untargetted nature of these reliefs is actually increasing innovation.
The full report is available here.
This research featured in The Times.