HMRC’S annual report – a step forward in raising standards

After a period of increased compliance activity in R&D tax relief, the publication of HMRC’s Annual Report and Accounts 2023 -2024 offers some encouraging insights.

One of its headline findings – that policy and operational measures they’ve implemented are estimated to have reduced error and fraud for expenditure in 2023 to 2024 to an overall level of 7.8% – is particularly heartening. So too is the finding that only 10% of claims examined in the latest random enquiry programme (2021/2022) are fraudulent, meaning that the vast majority – 90% of that 7.8% – are a result of error.

The reduction in the amount of error and fraud found by HMRC is positive. Its compliance officers work hard to raise standards within the industry and, as a firm that has long campaigned for improved standards, it is something that we are delighted to see.

A note of caution

Delve a little deeper though and there’s reason to be cautious. It’s important to remember that the figures, while encouraging, are estimates. The report captures enquiries closed – or at least in progress – during year ended 31 March 2024, so because of the long-running nature of enquiries there is inevitably a time lag, and while the data appears positive, it may not be definitive. Indeed, the report says that the 2021/2022 figures have had to be revised again because they were based on inaccurate assumptions. That may yet prove to be the case with the figures for subsequent years too.

More fundamentally though, it’s important to keep in mind that how HMRC defines “error” is based on a broad range of factors. Companies might, for example, give up on an enquiry because the tax saving that they expect does not outweigh the investment – in terms of time, energy, and professional fees – they might have to continue making to secure it. The length of an enquiry and HMRC’s sometimes intransigent attitude may contribute to a decision by a company to concede despite having good R&D.

This brings into question HMRC’s volume approach to enquiries and the extent to which this reduction is actual error. Previously the assumption would have been based on properly risk assessed and targeted enquiries into claims, which would have supported the assumption that there was a higher proportion of error and fraud in those cases under review. The random enquiry programme is just that: random. It does not support that assumption.

The CIOT has already expressed its concerns regarding HMRC’s volume compliance approach. As it continues its work to “reduce the collateral damage”, it this week issued a call for agents to share recent examples of issues encountered during the compliance process with it. Feedback that it has shared so far includes:

• Widespread poor quality letters;
• Lack of engagement from HMRC on what R&D is in some cases; and
• Difficulties with closure notices.

What next?

The CIOT’s recent post confirms that HMRC is taking steps to improve escalation routes, quality checks and the training of caseworkers. CIOT has highlighted to it that progress “feels slow”, with “limited impact in practice as yet”.

We agree. More investment in HMRC to train the large team of new compliance officers working in this area is much needed. So too is greater amplification of recent positives such as the publication by HMRC of the Guidelines for Compliance 3. Give them the publicity they deserve – both internally within HMRC and externally – and we will see overall standards rise.

If HMRC can enact these changes and improve the enquiry process, HMRC’s next annual report could provide real cause for celebration.