For R&D tax consultants like us, the publishing of the HM Revenue and Customs (HMRC) Annual Report and Accounts is of great interest as it can often reveal the current way that R&D tax relief is being viewed by the Government.
Overall, the numbers in the report were positive regarding higher tax collection figures and closing the tax gap.
This should all work in favour of a Government that is finding it increasingly difficult to balance the budget.
Alongside the figures being detailed, the report required the auditors to qualify their Audit Opinion regarding fraud & error within two areas: Child Benefits and R&D Tax Credits.
It is the breakdown of the R&D tax relief that I will be looking at here and helping you understand what it could mean for your clients.
What did the Annual Report and Accounts say about R&D tax relief claims?
The Controller and Auditor General commented that R&D tax reliefs “have proved attractive to those seeking to abuse them, opening up opportunities for fraud.”
While that might sound like a signal of doom for R&D tax relief, the auditor also examined the changes that have been made recently.
The auditor acknowledged that HMRC had taken steps to reduce the level of fraud and error within R&D tax relief, and the “overall rate of error and fraud in total R&D expenditure across the SME and RDEC schemes for 2022 to 2023 is lower than estimates for 2020 to 2021 and 2021 to 2022.”
Nevertheless, the auditor still felt bound to qualify this statement in the Annual Report and Accounts because of the high level of fraud and error still occurring with R&D tax relief.
HMRC’s Chief Executive stated in the Annual Report and Accounts, “I’m clear about where we need to improve, and this report points to several further priority areas.
“For example, we have implemented policy and operational changes in R&D reliefs, including additional information requirements and increasing R&D compliance capacity and activity.
“As a result, the overall estimate of the level of error and fraud in R&D tax relief schemes in 2022 to 2023 has reduced to 9.9% (£759 million).
“And while we achieved efficiency savings of £724 million over the last Spending Review period, we know we need to continue reducing costs and improving productivity and efficiency, if we’re to meet our target of £886 million of cumulative annual efficiency savings from 2026 to 2027 to 2028 to 2029.”
What does the Annual Report and Accounts mean for accountants and businesses?
As an accountant, you don’t need me to tell you how large a number £759 million is.
HMRC seem content to boast about the reduction of fraud and error to 9.9 per cent, but if nearly a tenth of the work you did was erroneous, it would be no cause for celebration.
Tellingly, the fact that they continue to be chastised by their auditor for the serious level of fraud and error that is still occurring with R&D tax relief indicates that we can expect further heavy investment in compliance.
As for what this may look like is anybody’s guess, but I imagine a few old tricks may be showing up again soon.
While we would hope for more staff or more training that could result in better ways of enquiring or better ways of framing their argument for not paying R&D out, there is a chance they may take an easier road.
By making it even harder to claim R&D in the first place and launching more enquiries into R&D tax relief claims, HMRC may be hoping to cut costs without putting in additional work.
As R&D tax consultants, we advise a hope for the best, prepare for the worst approach.
We fully agree that R&D tax relief claims have improved, but can see that the process will continue to get tougher.
Using a trusted R&D tax consultant remains the best way to continue supporting your innovative clients, no matter what the future of R&D tax relief looks like.
