Instances of fraudulent R&D tax relief claims have surged in the past year, reaching an alarming £1.13 billion. This represents a fourfold increase compared to the previous year's figure of £336 million and now accounts for 17% of all claims.
Alarming Surge in Fraudulent R&D Tax Relief Claims
In response to the rising levels of fraud, HM Revenue and Customs (HMRC) has taken action by freezing numerous claims from smaller businesses. The majority of non-compliance occurs within the SME scheme, estimated to have a 24.4% error and fraud rate for 2020-21. HMRC notes that larger businesses have better oversight, making fraudulent claims highly unlikely in those cases.
According to the latest estimates from HMRC's Annual Report and Accounts for 2022-23, the overall error and fraud rate in R&D tax reliefs for 2020-21 stood at 16.7% (£1.13 billion) out of a total payout of £6.6 billion.
Acknowledging the severity of the non-compliance issue, the government has published its compliance approach to R&D reliefs. Measures taken by HMRC include increasing the number of staff working on R&D compliance and establishing a dedicated R&D anti-abuse unit to combat unscrupulous advisors and fraudulent claims.
HMRC's Actions to Tackle R&D Tax Relief Fraud
To address the problem, HMRC aims to improve guidance by providing updated examples of qualifying and non-qualifying activities, considering the rapid pace of technological advancements.
Additional changes have been introduced to tackle the issue, including the requirement for more information from claimants, digital claims, and a reduction in payable relief within the SME scheme. Some of these changes are already in effect, while others will be implemented from August 2023.
Starting from August 1, 2023, claimants will need to submit an Additional Information Form to allow HMRC to assess the validity of their claims. HMRC has also conducted risk profiling of claims across different business sectors and claim sizes, revealing that only 11% of R&D claims from the education sector are compliant, while 69% of claims from the manufacturing sector meet the requirements.
While the estimates confirm the extent of abuse, they also underscore the significant financial contribution R&D relief can make to legitimate businesses investing in research and development. However, compliant companies may face additional administrative requirements, necessitating careful planning and seeking expert advice to navigate the process effectively.
Navigating the R&D Tax Relief Landscape
Businesses facing inquiries into their R&D claims are advised to consult specialists experienced in dealing with R&D investigations to handle these serious matters.
HMRC's rigorous compliance checks have presented challenges for genuine applicants. The introduction of a pre-claim approval form aims to simplify the process and alleviate some of the hurdles.
In conclusion, fraudulent claims for R&D tax relief have surged to over £1.13 billion. HMRC's efforts to address the issue include additional staffing, improved guidance, and changes to the claim process. While compliant businesses may face increased administrative burdens, proper planning and seeking expert advice can help navigate the evolving landscape of R&D tax relief.
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