The amount of research and development tax reliefs claimed in the last 12 months shot up by 11% to £7.6bn, despite a quarter of SME claims estimated to be fraudulent
There was £44.1bn of R&D expenditure by over 90,000 companies with an increase in use of the tax reliefs by SMEs.
While the figures showed a slight increase in the number of SMEs claiming tax relief and a 14% increase in total support claimed under the SME scheme, the figures may represent the high watermark for such claims, amid efforts to clamp down on fraud and error in the system and improve value for money for taxpayers.
HMRC has been running a high profile campaign to curb abuse of R&D tax relief and has introduced a pre-approval form for new claims which all claimants need to use. Early reports indicated that half of companies had failed to fill in these forms correctly, a sign that high levels of abuse could now be curbed. Figures released in July showed that 24.4% of claims in the SME scheme were fraudulent.
Carrie Rutland, head of innovation incentives at BDO said: ‘HMRC has been rightly concerned about error, fraud and ‘boundary pushing’ when it comes to R&D tax relief and has introduced a number of measures to clamp down on non-compliance.
‘However, many of these measures were not in force in 2021-22, so there may be a time lag before we see their impact on the numbers of claims and the amounts of relief paid out.
‘The process for claiming the relief is becoming more complex and we expect higher levels of scrutiny of claims, notably in high risk sectors.’
One of the reasons for an increase in claim value was a return to pre-pandemic levels of investment.
Jenny Tragner, director at Forrest Brown said: ‘This return to growth suggests last year’s figures were at least in part the result of suppressed business investment in innovation as companies focused on surviving the tough economic conditions of Covid.
‘At face value, more R&D expenditure is good news for the economy. However, it is difficult to draw accurate conclusions from this data while there continues to be a lack of clarity over the extent of error and fraud in the incentive.
‘The impact of HMRC’s measures to improve compliance will be clearer in next year’s figures, with concerns remaining that genuine innovation could become collateral damage in a volume-based approach to tacking error and fraud. It is vital that HMRC brings abuse of the incentive under control quickly but carefully.’
The HMRC figures show that there was a concentration of claims by companies with registered offices in London (22% of claims and 32% of amount claimed), and the south east (15% of total claims and 18% of amount claimed). However, the registered office location may not be where all the R&D activity takes place.
Two thirds of claims were from the information and communication, manufacturing, and professional, scientific and technical sectors.
As part of efforts to stamp out widespread abuse of R&D relief, HMRC is running a programme of educational activity focused on the areas of highest risk. It has also doubled the number of people working in R&D compliance over the last three years, adding an extra 300 staff to tackle non-compliance.
There are also plans for significant reform of R&D rules from April 2024.
HMRC plans to merge the two current R&D schemes into one, based on the existing RDEC scheme from April 2024. The proposals for the merged scheme, as currently drafted, will mean that smaller companies see a further reduction in the benefit they get from R&D relief claims unless they qualify as ‘R&D intensive’.