Over recent months, HMRC has conducted an in-depth analysis aimed at gaining a better understanding of non-compliance within the country’s research and development (R&D) tax reliefs. The resulting comprehensive study focused on the 2020/2021 tax year and represents the most detailed examination of these reliefs to date, utilizing a new methodology known as the mandatory random enquiry program (MREP) for small and medium-sized enterprise (SME) claims. The results, published this week, revealed significant levels of non-compliance, highlighting the need for stricter measures.
According to the updated analysis, the estimated level of error and fraud within the R&D tax reliefs for the fiscal year 2020-2021 equated to 16.7% of the total tax relief claimed, equivalent to £1.13 billion. This figure is significantly higher than the previously published estimate of 3.6%, or £336 million for the same period. The non-compliance estimate for the SME scheme alone is 24.4%, totaling £1.04 billion, while the R&D expenditure credit (RDEC) scheme stands at 3.6% (£90 million). Comparatively, the previously reported figures for 2020-2021 were 5.5% (£303 million) for the SME scheme and 0.9% (£33 million) for the RDEC scheme.
It is important to note that due to the time constraints associated with filing a corporation tax return and conducting compliance enquiries, there is a 2-year delay in estimating non-compliance levels using the MREP. As a result, the latest analysis does not fully account for recent government reforms, aimed at reducing non-compliance, introduced over the past 3 years. Consequently, the true extent of the changes and their impact on non-compliance are not reflected in the current estimates.
The UK government has expressed its clear dissatisfaction with the level of non-compliance identified within the R&D tax reliefs. The findings indicate a significant problem that must be addressed promptly to ensure the effectiveness and integrity of these incentives. This recent analysis conducted by HMRC sheds light on the substantial non-compliance within the UK’s R&D tax reliefs. The government acknowledges the need for immediate action but does expect that changes announced in the 2022 Autumn Budget and 2023 Spring Budget will have a positive impact, contributing to a £250m reduction in non-compliant claims. Couple these changes with a significant increase in the number of tax inspectors employed by HMRC, and it is hoped that these issues will begin to subside.
The analysis shows that more than 90% of R&D claimants are represented by an advisor or agent, suggesting that many are not up-to-date in the nuances of the R&D tax relief system and submitting non-compliant claims. This further highlights the need to seek professional advice from agents who are highly experienced in the assessment of R&D tax relief claims. For questions or to schedule a no obligation call, please contact thomas.wells@frazierdeeter.com.