Sharp rise in R&D tax credit claims is cause for both optimism and concern, says industry experts

A significant increase in the total number of research and development (R&D) tax credit claims paints a promising picture of innovation in the UK, but may still indicate a lack of regulatory scrutiny, according to industry experts.

“If we’re going to be competing on the world stage, we need to be investing at similar levels to economic superpowers, and so to see growth in R&D investment is overall a very positive place to be,” says Mark Smith, innovation incentives partner at advisory firm Ayming UK.

“As we look to the future to grow and be successful as a country, I think R&D should absolutely be at the heart of that.”

Official statistics published by HMRC in September show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).

Smith expresses a degree of concern in relation to the latest R&D tax relief figures, noting that of the 85,900 claims made, 85 percent were less than £100,000 in value – conceivably an indication of “spurious claims”.

He also referenced a report published by the National Audit Office in 2020, which calls into question HMRC’s ability to police fraudulent or overinflated R&D claims.

“Because you’ve got such a large volume of small value claims, I think it’s very difficult for [HMRC] to properly police whether they’re substantiated. I suspect there are a lot that go under the radar.

“On the face of it, there’s money to be had that is relatively easy to access. On that basis, I would say that the increase is both positive and negative.”

Smith’s concerns are compounded by R&D spending data compiled by the Office for National Statistics. While HMRC’s latest statistics show that R&D relief was claimed on £47.5m of expenditure, just £25.9m of R&D expenditure was recorded by the ONS during the same period.

According to Jenny Tragner, director at ForrestBrown, a leading specialist R&D tax credit consultancy, the data is a cause for concern.

“While there are legitimate differences between the two figures, none would appear to explain such a gap,” she says.

“The gap is worrying, and HM Treasury is concerned that it points to errors or poor targeting of R&D relief.”

Tragner argues these figures, driven largely by the increase in SME claims, bring to light the need for reform in the R&D regime, and that more must be done to ensure compliance.

A viable option, she suggests, would be to combine the SME scheme with the research and development experimental credit (RDEC) model – the R&D scheme for non-SMEs – for HMRC to simplify its compliance activities.

“HMRC needs to have timely and accurate data on errors and frauds to understand how and where these are occurring and address them in an efficient and effective way.”

Smith admits there is value in reforming the SME scheme, but argues that additional resources are key to ensuring stricter compliance.

“At the moment, HMRC has the requisite powers to properly regulate the scheme – the problem is lack of resources,” he says, echoing points made in an R&D tax relief consultation paper published by HMRC and HM Treasury earlier this year.

“A lot of the questions in the consultation seem to be focused on how they could do more with less, such as putting more of the burden on taxpayers.”

Smith adds that while advisory firms like Ayming are key in ensuring compliance, the onus is on the government to improve and tighten regulation.

“It’s definitely incumbent on the industry to make sure that firms are complaint, but HMRC can’t just ditch their responsibility as the primary regulator of taxpayers in the market.

“They need to take on some responsibility themselves, and all three groups [government, advisors and businesses] need to work together to make sure that we’ve got a well-functioning system.”