Warning as HMRC cracks down on R&D tax relief

Mar 18, 2024

Businesses are being warned that HMRC is cracking down on potentially fraudulent claims for research and development (R&D) tax relief. 

The tax credits are aimed at companies investing in innovation. The Government has rewarded them for this through the rebate of up to 27 per cent of R&D costs and they can then use the cash to help them sustain and grow the business.

But HMRC claims the system has been abused over recent years and at the height of the pandemic, more than £1bn was lost to error and fraud in tax relief out of £7.6bn claimed for the 2021-22 tax year.

Now, following recommendations by the National Audit Office spending watchdog, it is investigating many older claims to see if they were legitimate while in the recent Budget, Chancellor Jeremy Hunt announced a new expert advisory panel to support HMRC in the scheme. 

It is also proposed that from April, two existing relief schemes – the research and development expenditure credit (RDEC) and the small and medium-sized enterprise scheme (SME) will be merged into one single Research and Development Scheme with the aim of boosting efficiency and avoiding future abuse.

Experts at accountants and business advisors Whitley Stimpson are urging businesses to seek expert advice whether they have already received tax credits or are looking to apply for relief in future.

Director Ian Parker said:

“The system has become a lot more complicated, and care has to be taken to ensure you qualify under the revised rules. HMRC lost a lot of money during Covid and now it is looking to take some back, so it is important businesses stick to the criteria.”

There has been a lot of press that the new merged scheme will be less beneficial for SMEs as the rate of credit for qualifying R & D costs is far lower than under the old SME R & D Scheme. 

However, one incentive from the reassessment has been that the qualifying threshold for loss making SMEs to qualify as “R & D Intensive” will be cut from 40 per cent to 30 per cent of a company’s total expenditure meaning more SMEs could qualify for relief. If the SME does qualify as R & D Intensive then it can effectively stay on the existing SME R & D Scheme and benefit from the higher rates of tax credit available.

Also, the reformed policy will allow most companies outsourcing their R&D activities to claim tax relief for the associated costs but unlike the current rules, the small business contractor will not be able to make a claim if their contractor can do so. 

Ian added:

“There is plenty of room for confusion with this legislation and if anyone is in any doubt they should seek professional advice to avoid any future penalties.”