Claims for multibillion-pound business tax incentives are more likely to be non-compliant when submitted with the assistance of specialist agents, according to an official review by HM Revenue & Customs (HMRC).
An inquiry into research and development (R&D) tax credits—schemes intended to encourage innovation but undermined by fraud and error—found that behaviour among some agents was “clearly not acceptable”.
In its review of incentives for business innovation, HMRC estimated that fraud and error in these taxpayer-funded schemes amounted to £4.1 billion between 2020 and April this year. The tax reliefs, designed to support companies working on science and technology projects, cost the UK about £8 billion annually.
A 2022 investigation by The Times revealed how advisers were encouraging companies to make dubious claims, many of which went unchecked by HMRC. Examples included claims for creating a vegan menu in a pub.
In response, HMRC has increased scrutiny on claims and implemented several reforms to the scheme’s rules. A document published alongside last month’s budget stated that data from a “mandatory random inquiry programme” found that almost one in three claims in its sample were “fully disallowed” because “no qualifying R&D took place”.
Overall, HMRC estimated that in 2021-22, over one in four claims under the scheme for small and medium-sized enterprises were due to fraud and error. By the most recent financial year, this figure had improved to about one in seven.
While agents are expected to help companies file accurate claims, HMRC’s inquiries revealed that “non-compliance was slightly higher in those claims that were submitted with the support of a specialist R&D agent”.
HMRC acknowledges the “vital role” agents play but noted that some “provide poor or incorrect advice to customers about what they are entitled to claim. This can lead to spurious R&D tax relief claims being submitted by customers themselves or by agents on their behalf, thereby increasing non-compliance”.
The review identified several sectors where “R&D is unlikely” but which were being “approached by unscrupulous agents”. These include care homes, childcare providers, personal trainers, wholesalers, retailers, pubs, and restaurants. Error was said to be a bigger problem than fraud.
To address this, HMRC has been running education campaigns, writing to thousands of companies to explain the qualifying criteria for R&D tax credits.
Companies in sectors traditionally associated with R&D investment have reported difficulties obtaining incentives since HMRC’s crackdown. Research by RSM UK, the accountancy and audit firm, found that more than a third of technology businesses had submitted an R&D claim that was initially approved but later challenged by HMRC, resulting in companies needing to make repayments.
David Blacher, partner at RSM UK, commented: “The increased focus on weeding out erroneous claims has been detrimental to those genuinely in need of funding.”
