HMRC’s R&D Tax Reliefs: A Costly Miscalculation

The UK government's Research & Development (R&D) tax relief scheme, particularly the relief for small and medium-sized enterprises (SMEs), has been a cornerstone of the incentivisation of innovation in SMEs. However, in recent years there has been a growing concern that HM Revenue & Customs may have significantly underestimated both the level of risk of abuse and the costs of the scheme. This raises questions about the effectiveness of the program and its potential impact on both taxpayers and the UK's innovation ecosystem.

The Underestimation:

• Rising Costs: The National Audit Office (NAO) reported in 2023 that HMRC underestimated the cost of the R&D SME relief scheme. Initial estimates placed the cost at £336 million, but a later revised estimate revealed a staggering £1.13 billion – a threefold increase.

• Non-compliance Concerns: A deeper dive into the claims revealed a higher-than-expected level of abuse. The estimated error and fraud rate for the SME scheme jumped from 5.5% to 24.4%, indicating widespread abuse or genuine mistakes in claiming relief.

• Resource Gaps: The NAO report highlighted concerns about HMRC's resources dedicated to managing the scheme. The complexity of R&D activities and the rise in claims outpaced the department's capacity, leading to potential gaps in compliance checks.

Consequences and Concerns:

• Wasted Resources: The underestimated cost and abuse raise questions about the effectiveness of the scheme. If a significant portion of the relief goes to ineligible claims, it represents a missed opportunity to support genuine innovation.

• Erosion of Trust: The perception of widespread abuse could erode public trust in the scheme and discourage legitimate businesses from participating, potentially hindering its intended purpose of boosting innovation.

• Increased Scrutiny: HMRC's response has been to tighten compliance measures, leading to stricter scrutiny for all claims. This, while necessary to address non-compliance, could create unnecessary burdens for legitimate businesses.