A quarter of R&D tax relief payouts to small businesses has been lost due to fraud and error, HMRC has admitted.
There are two R&D tax relief schemes which have been affected – one for smaller business and one for larger companies. In total between these two schemes, HMRC says £1.1bn was lost between 2020 and 2021. The scheme for small businesses was responsible for £1bn of this, with one in four claims made in error or because of a scam.
It was initially estimated that 5.5 per cent of the payout was lost, however a recent revision found the figure to be much higher at 24.4 per cent.
The tax credits are for high growth, innovative businesses. According to The Times, HMRC said that although the schemes were “a vital driver of innovation”, “the levels of non-compliance are clearly unacceptable. We are introducing new measures to address these issues.”
Justin Arnesen, partner in the R&D tax team at financial advisory firm Evelyn Partners, said: “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.
“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.”
More on R&D for small businesses
Government proposes to revamp R&D tax credits for small businesses – A consultation document from the Government published on Friday acknowledged there was “merit to the case for further support” to small and medium-sized businesses