His Majesty’s Revenue and Customs (HMRC) has reported an increased estimate of £1.1bn in the total level of error and fraud in research and development (R&D) tax reliefs for 2020-21, up 16.7% of its previously published estimate.

The Government service initially estimated that this figure was £336m, and the Government has stated that this level of non-compliance is unacceptable.

Alongside the 2021-22 report by HMRC, the Government has also published its compliance approach to the R&D reliefs, which sets out the scale of non-compliance in the tax relief schemes, as well as the action taken by the Government to date, and the department’s compliance approach to R&D.

Despite efforts to tackle this, the Government has been scrutinised, with former counter-fraud minister, Lord Agnew of Oulton, saying that “this instance is another example of the incompetence that pervades the halls of Whitehall”.

Partner in the R&D Tax team at Evelyn Partners, Justin Arnesen, added: “R&D tax reliefs are instrumental in encouraging businesses to invest in R&D, which brings broader benefits to the UK economy in the form of developing new products and creating jobs. However, this latest update from HMRC highlights the size of the problem that HMRC is tackling in its attempts to combat fraud and error within the system.

“Improved guidance is part of the wider plan to reduce error and fraud within the R&D regimes, and HMRC has committed to making further improvements as part of its plan. To have an impact, however, considerable changes are required, particularly to guidance around ‘modern/relatable examples’ of both qualifying and non-qualifying activities. This is important as technology is moving at an unprecedented pace – the R&D Guidelines have a qualification example pertaining to the development of a DVD player, for example, this technology is obsolete and provides little relatable guidance/reference points for taxpayers. Guidance improvements will need to be accompanied by plans to bring HMRC caseworkers up to speed on both the new guidance and the technical qualification criteria.

“To tackle this worrying problem, a range of additional changes have been introduced. These range from requiring additional information from the claimant and requiring claims to be made digitally, to reducing the amount of payable relief in the SME scheme. Some of these changes are already in place and others come into effect from August 2023.

“Even though HMRC will share a further update on its approach to improving compliance with R&D tax reliefs in winter 2023, given the two-year time lag on the estimates, we may not know for some time whether these measures have had a meaningful impact. It may be that additional measures, such as requiring additional information directly from advisers, or an annual adviser audit, will need to be considered.”

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