The National Audit Office (NAO) turned its attention to R&D tax relief as part of its report on tax measures to encourage economic growth released in January 2024. This was published against the backdrop of HMRC’s heightened focus on compliance for R&D tax relief. Although driven by an understandable need to clamp down on error and fraud, HMRC actions have left some genuinely innovative businesses on the backfoot.
Insights from the report on tax measures to encourage economic growth
The NAO’s report highlights that HMRC was too late in taking action to understand the reasons for the substantial increase in the volume of R&D claims between 2013 and 2022. It was during this period that the cost of R&D SME relief increased by nearly 575% in cash terms.
This delay is widely acknowledged to have led to an increase in poorly prepared R&D claims, abusive agents exploiting the system and outright fraud. HMRC estimates that £1.04 billion may have been lost to error and fraud in 2020-21 alone.
HMRC compliance actions
As a result, there has been a material impact on the reliability of data on R&D expenditure and the cost of R&D tax reliefs. Compounding that, serious concerns have been raised regarding HMRC’s recent compliance actions.
While increased scrutiny of R&D claims is very welcome, the deployment of inexperienced case workers has led to ‘collateral damage’ in the form of legitimate R&D claims being rejected. Compliance action can take many months or even years to resolve, and HMRC’s decisions can be later overturned on appeal. These issues are likely to obscure the reliability of data on error and fraud in R&D claims for years to come.
While the NAO report recommends that lessons are learned from the challenges experienced by the SME R&D incentive, the situation is still evolving and is far from resolved. A more urgent recommendation is that HMRC allocates the right volume and quality of compliance resources that the incentive deserves.
Introduction of a merged scheme
HMRC’s ongoing compliance campaign is just one piece of the puzzle – policy changes announced at the Autumn Statement combined the SME and RDEC incentives into a merged R&D tax relief scheme, starting from April 2024. This change to streamline the incentive is well intentioned as a simplification of the system. However, there will be winners and losers when the new scheme takes effect. Businesses must plan ahead to successfully navigate this evolving landscape.
Of course, there are still concerns over the practical implementation of the single scheme. It won’t actually function as the name suggests as the R&D-intensive incentive for loss making SMEs will coexist alongside it. Therefore, instead of the merged scheme signifying the closure of this debate, in reality, it should mark the beginning of one. We need open, timely communication from HMRC and the government in supporting companies to navigate these substantial changes.
Act now with tailored support from ForrestBrown
Businesses are only months away from implementation. Now is the time to carefully consider all the details of the recent and forthcoming changes to ensure you aren’t caught out. Your business needs to be able to manage any disruption to your funding. Our FB Consulting team includes tax specialists, lawyers and an ex-HMRC inspector, making it perfectly positioned to help businesses navigate these challenges.