HMRC annual report and accounts: key points
- Error and fraud in R&D claims has declined and is projected to fall further.
- Declining rate attributed to operational and legislative changes.
- While the figures point to a welcome period of stability for the incentive, businesses should continue to protect themselves from risk.
How the R&D tax relief incentive is performing
HMRC’s Annual Report and Accounts 2025 to 2026 offers a timely insight into how the R&D tax relief incentive is performing.
It reveals that policy and operational changes to the relief have reduced error and fraud for 2024/25 and 2025/26 to around 5.3%. That figure is less than the 6.4% estimated for 2023/24. It is also less than the estimated figure for the period set out in HMRC’s Annual Report and Accounts 2023 to 2024, of 7.8%.
The question now: do these figures tell the whole story? And what can we expect in future years as changes to the incentive further embed?
What does the report say?
HMRC’s Annual Report and Accounts 2025 to 2026 confirms an uptick in R&D tax relief spend to £8 billion in 2025/26 compared to £7.7 billion in 2023/24.
Of the total amount spent in 2023/24, the report estimates that the level of error and fraud sits at 6.4% (£493 million). This breaks down as 11.1% (£347 million) for the SME scheme and 3.2% (£146 million) for the RDEC scheme and represents a decline from 2021/22 when the estimate of the level of error and fraud in R&D tax relief schemes was 17.6% (£1.34 billion). The estimated 2023/24 and 2025/26 figure for error and fraud of 5.3% confirms an ongoing downward trend.
The report cites “legislative and operational changes”, notably the “mandation of digital claims and additional information requirements introduced in 2023”, as contributing to the decline. It expects the ongoing impact of the legislative changes, coupled with the replacement of the old RDEC and SME schemes by the merged RDEC and Enhanced R&D Intensive Support (ERIS), to impact further.
What ForrestBrown is seeing in practice
The reported ongoing decline in error and fraud mirrors what we have seen in practice. Enquiries into R&D claims have steadily declined since the peak during 2022 to 2024. Many of the enquiries that we advised businesses on had been initiated at random by HMRC, while others were the result of a more targeted approach based on the company’s Companies House standard industry classification (SIC) code.
The announcement in March this year that HMRC would end its controversial volume compliance approach run by its Individual and Small Business Compliance (ISBC) Campaigns & Projects team, and work its remaining cases to closure was further confirmation that the heightened compliance environment of recent years would diminish. That doesn’t mean that enquiries won’t exist, and claimants should not protect themselves from risk, but that HMRC will instead focus on tackling more “complex risks”, using its Wealthy and Mid-sized Business Compliance (WMBC) Directorate.
As an adviser which has long championed improved market standards, confirmation that error and fraud has fallen both in relative and absolute terms, and is predicted to fall further, is positive news. The combined impact of HMRC’s compliance efforts coupled with legislative measures such as claim notification and Additional Information Form (AIF), and reducing rates, have had the impact HMRC intended.
Impact of R&D changes isn’t all positive
While we welcome this, we should also acknowledge the unintended consequence of the changes: that many innovative companies that do R&D no longer claim. Many, particularly SMEs, for whom the changes have had a disproportionate impact, will have been put off claiming by the dual effect of increased process complexity and the risk of protracted compliance checks. During the height of HMRC’s heightened compliance environment, for instance, it wasn’t unusual for enquiries to last up to 18 months – an issue that I spoke to the Financial Times about.
The other point to be mindful of is that the reported figure still conflates error and fraud. Mistakenly getting your claim wrong (or accepting a reduction in its value on enquiry in the interests of getting to a resolution), is entirely different from deliberately setting out to defraud the system. We don’t know what proportion of that 5.3% is a result of error and what reflects fraud. Greater analysis of the split between the two would be helpful.
What’s next?
The figures provide further evidence that the effect of the heightened compliance environment, coupled with legislative and process changes, are having the intended effect. Error and fraud for the incentive is down and is predicted to fall further, hopefully signalling a welcome period of stability.
It will be interesting to see these figures in future years once the transition from SME and RDEC to the merged scheme and ERIS has taken full effect. For now, we can take heart in a return to a seemingly more positive approach, reconnecting with the original policy intent.
Need support with your R&D tax relief claim?
ForrestBrown helps businesses with all aspects of R&D tax relief claims, from end-to-end claim support to compliance advisory and one-off consulting projects. If you are currently with another provider, we can also provide a free, independent review of your last claim, ensuring that value has been optimised while also protecting it from risk.
Get in touch to discuss how we can support your R&D.