On 17 July 2023 HMRC published an analysis of the scale of non-compliance in the research and development (R&D) tax relief schemes and the approach taken to enforcing taxpayer compliance.

The UK has two R&D tax relief schemes, a scheme for small and medium enterprises (SMEs) and the R&D expenditure credit scheme (RDEC) for large companies and other companies not eligible for the SME relief. The government has consulted on merging the schemes, but a final decision has not yet been taken. The number of R&D claims made through the schemes has been rising each year and there were 89,300 claims, totalling GBP 6.6 billion by 2020/21.

Where financial support is provided to a large number of claimants there is a risk of abuse. In recent years there has been concern about taxpayer abuse of the R&D schemes, especially concerning abuse by SMEs. A review of the schemes was launched by HMRC in 2021.

A mandatory random enquiry programme was introduced for SMEs claiming under the SME scheme or the RDEC, with investigation of random samples of claims to allow a more accurate estimate of the frequency of non-compliance. This programme did not include large business taxpayers as the co-operative compliance model in HMRC’s Large Business Directorate already gives an insight into the claims made.

In the past three years, HMRC has more than doubled the staff involved with R&D compliance. A dedicated R&D Anti-Abuse Unit was created in July 2022 to tackle incorrect claims and open enquiries into the most complex cases. Measures such as payment identification and verification controls have been introduced for all claimants.

New policy measures have been announced to counter non-compliance, with some measures already in place and others becoming effective from August 2023. All claims must be made digitally and accompanied by additional information to allow higher-risk claims to be identified. Each claim must be supported by a named officer of the company and details of any agent used in the claim must be disclosed.

The amount of payable relief in the SME scheme has been reduced to GBP 20,000 plus 300% of the company’s PAYE and NIC liabilities, to combat artificial claims where there is little UK activity. The SME scheme rate reduction, applicable from April 2023, will also help to reduce levels of non-compliance.

The data obtained from the mandatory random enquiry program indicates that a significant amount of non-compliance in making R&D tax relief claims results from errors by the taxpayer. HMRC therefore aims to reduce incorrect R&D tax relief claims by improving taxpayer education. HMRC is also working closely with agents to raise standards and improve HMRC communications and guidance, and decisive action is taken where agents abuse the tax relief.