A £1.13bn problem: HMRC’s crackdown on R&D tax errors
HM Revenue & Customs (HMRC) has launched a voluntary disclosure initiative aimed at companies that have overclaimed research and development (R&D) tax relief, marking a significant step in its ongoing efforts to reduce misuse of the scheme.
With historic errors and fraud costing the Treasury over £1.13bn, this move highlights the government’s determination to restore compliance within a system that has long supported UK innovation.
However, the timing and design of the initiative have raised concerns over its potential impact.
A History of Non-Compliance
Analysis of R&D claims for the 2020-21 tax year revealed troubling figures: 24.4% of claims under the SME scheme and 3.6% under the Research and Development Expenditure Credit (RDEC) scheme were either erroneous or fraudulent. This level of non-compliance, which equated to £1.13bn in costs, was branded “unacceptable” by HMRC, prompting tighter scrutiny and enforcement measures.
Since March 2022, HMRC has bolstered its compliance operations, significantly increasing the number of inspectors reviewing R&D claims. While these efforts have been effective in identifying fraudulent activities, they have also delayed the processing of legitimate claims, creating frustration among businesses reliant on timely cash flow from tax credits.
The Voluntary Disclosure Service
The newly launched service is designed for companies that meet the following criteria:
- They claimed excessive R&D tax relief.
- They can no longer amend their tax returns due to expired time limits.
- They need to pay additional Corporation Tax or repay overclaimed tax credits.
Submissions can be made directly by company representatives, such as directors, or via tax advisers acting on their behalf. HMRC has emphasised that voluntary disclosures are preferable to prompted investigations, which carry the risk of higher penalties and, in extreme cases, criminal charges.
Mixed Reception from Industry Experts
While the initiative has been broadly welcomed as overdue, experts have questioned its design and the decision to launch it on New Year’s Eve—an unusual timing that may have limited awareness.
Dawn Register, tax dispute resolution partner at BDO, noted that the lack of incentives, such as protection from criminal prosecution or extended payment terms, could deter companies from coming forward. She also highlighted the historical role of unscrupulous claims agents, who have targeted sectors like care homes, retailers, and hospitality businesses with speculative R&D claims.
“Many companies now realise that past claims prepared by such agents were, shall we say, ‘optimistic’. Voluntary disclosure is certainly the way forward for these businesses,” Register said.
Peter Clark, R&D technical director at RCK Partners, echoed this sentiment, describing HMRC’s intensified compliance efforts as both necessary and overdue. However, he warned that the broader crackdown has inadvertently delayed payments for legitimate claims, further straining businesses already navigating economic challenges.
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Targeting High-Risk Sectors
Sectors deemed unlikely to involve genuine R&D, such as childcare providers, personal trainers, wholesalers, and pubs, are expected to feature prominently among disclosures. Rogue agents, now largely defunct, actively exploited these industries, submitting speculative claims that have since drawn HMRC’s scrutiny.
For companies operating in these sectors, voluntary disclosure offers a route to resolve past inaccuracies with reduced financial and reputational risks. “Opting for disclosure and arranging a payment plan with HMRC is far better than facing a prompted investigation, which could result in higher penalties and potential criminal charges,” Clark advised.
The Road Ahead
From August 2023, HMRC introduced stricter compliance measures, including mandatory submission of a detailed additional information form alongside R&D tax relief claims. These steps aim to safeguard the integrity of the scheme while maintaining access to much-needed innovation funding for legitimate claimants.
However, industry voices caution that excessive rigidity may discourage businesses from engaging with the scheme altogether. Register pointed out that tightened rules have made it harder for genuinely innovative SMEs to access support, risking a chilling effect on UK R&D investment at a time when economic growth is already fragile.
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