In a significant move aimed at ensuring the accuracy and legitimacy of claims, a report by the House of Commons revealed that HMRC has increased its compliance checks for Research and Development (R&D) Tax Credits. From previously reviewing about 1% of claims, HMRC has escalated this figure to an unprecedented 20%. This adjustment signifies a robust shift in HMRC’s approach to scrutinizing 1 in 5 R&D tax relief submissions, reflecting its ongoing efforts to clamp down on abuse and error in the tax credit system.

Why have Compliance Checks increased?

R&D Tax Credits are designed to encourage innovation and growth within the UK economy by allowing businesses to reduce their tax liability or receive payable tax credits in return for their investment in R&D. However, with this incentive comes the potential for both inadvertent errors and intentional fraud, prompting HMRC to take a stricter stance for SMEs. HMRC estimated in the 2022-2023 annual report that fraud accounted for 16.7% of the funding paid out via the Scheme during the 2020-2021 tax year, which cost the UK taxpayer over £1 billion. More recently, HMRC described in a letter to the Chartered Institute of Taxation (CIOT) that they believed this to be much higher with half of claims being fraudulent in some way. They need to get a handle on the misuse and clean up the system to:

1. Address Fraud and Errors

These discrepancies range from misunderstanding what constitutes eligible R&D activities, to deliberate falsification of expenditures to benefit from the tax relief. By increasing the number of compliance checks, HMRC aims to deter these practices by enhancing the risk of detection for those attempting to exploit the system.

2. Ensure Proper Use of Government Resources

The R&D Tax Credit scheme represents a significant investment by the UK government in the country’s technological and scientific capabilities. As such, it is crucial that the funds allocated are used appropriately. Increasing compliance checks helps ensure that only eligible projects and genuine research activities receive this financial support, thereby safeguarding public funds.

3. Maintain the Integrity of the R&D Tax Credit System

By tightening the scrutiny of R&D claims, HMRC also seeks to maintain the integrity and effectiveness of the tax relief scheme. This is important not only for the businesses that genuinely invest in R&D, but also for maintaining public trust in tax relief programs. Ensuring that the system is free from abuse supports the credibility of both the scheme and the broader tax system.

What Does This Mean for Genuine R&D Businesses?

For businesses currently claiming R&D Tax Credits, or those planning to do so, the increased compliance checks signify a more rigorous verification process. Companies will need to:

Ensure thorough documentation: Detailed records of R&D activities, expenditures, and project management must be maintained to substantiate claims.

Understand eligibility criteria: Businesses should have a clear understanding of what qualifies as R&D activities under the guidelines provided by HMRC.

Seek professional advice: Considering the complexities of R&D Tax Credit claims and the increased risk of audits, obtaining expert advice from tax professionals could be more crucial than ever.

What triggers an R&D Tax Credit compliance check?

It can be confusing and frustrating when your R&D tax credit claim is subjected to a compliance check after navigating through a complex claiming process. You’ve already calculated how much you could receive from R&D tax credits, but for some reason, HMRC stopped the process. HMRC has intensified efforts to combat fraud in R&D tax credit claims. As part of their procedures, they’re conducting regular random checks on received claims. Industries with higher-risk activities are particularly targeted, increasing the likelihood of compliance checks on claims from these sectors. Consequently, even if your claim is perfect, without a single error, you may still receive an enquiry. Other reasons why you may receive a compliance check for a retrospective or current R&D claim are:

• An enquiry can be launched by HMRC if a tax agent believes that your submission contains costs or activity that they believe is not eligible.
• An enquiry can also be launched at random – like a quality assurance program. Their Mandatory Random Enquiry Program (MREP) serves the purpose of monitoring and investigating fraud and error. This is standard procedure in any diligent process inside and outside of HMRC.
• Finally, HMRC is using filters based on profiles of where fraud is expected – this is a volume-based approach and if your claim meets any of their criteria, it could be subject to an enquiry.

Should I be put off claiming R&D tax credits because of the risk of compliance?

Firstly, a compliance check should not be feared if you are carrying out genuine R&D and are following the guidance provided. No reputable advisor would encourage you to claim if you do not satisfy the eligibility criteria and would not put you at risk by including inaccurate costs. If you are compiling your claim without specialist external support, now is the time to seek professional advice and mitigate the risk of inadvertently including errors in your claim. This will save you time and simplify the challenges of all the changes that have come in over the last 12 months.

Such as:

• April 2023 changes
• Additional Information form
• R&D scheme merge changes

A good R&D Tax Credit advisor should be able to support you through all of the different types of compliant checks at no extra cost to their contracted service with you.

Our Team are here to help

As one of the UK’s leading specialists in tax consultancy, we at MPA are not just observers of the evolving R&D landscape but active champions, constantly striving to maximise the benefits for innovative businesses. With the recent announcement of significant changes to the R&D tax incentive schemes, including the merging of RDEC and R&D SME schemes and changes in compliance we’re at the forefront of providing clarity and guidance in navigating these transformations. Contact us now

Summary

HMRC’s decision to increase the compliance checks for R&D Tax Credits from 1% to 20% is a clear indication of its commitment to prevent abuse and ensure that the tax relief goes to deserving and eligible projects. While this may add a layer of scrutiny for businesses, it ultimately serves to protect the interests of all stakeholders involved in fostering innovation within the UK’s economy. Businesses engaged in R&D activities should see this as a prompt to tighten their own compliance and documentation processes, ensuring that their claims can withstand HMRC’s heightened scrutiny.