Make An Enquiry
Get in touch

0121-633-2000

enquiries@friendpartnership.com

Logo of Friend Partnership

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.

Looking Ahead:


  • Policy Review: The government has proposed merging the SME and Research and Development Expenditure Credit (RDEC), which currently mainly applies only to large businesses, into a single scheme. The intention is to streamline administration and potentially improve efficiency. However, concerns remain about addressing the root causes of underestimation and non-compliance.


  • Collaboration: Industry experts emphasise the need for collaboration between HMRC, businesses, and accountants to develop clearer guidelines, improve communication, and foster a culture of compliance.


  • Targeted Support: Focusing resources on high-risk claims and providing tailored guidance to SMEs could help ensure the scheme supports genuine innovation while minimising misuse.


HMRC's underestimation of the R&D SME relief scheme's complexities has created challenges. While addressing abuse is important, finding a balance between robust checks and avoiding unnecessary burdens for legitimate businesses is essential. Open communication, collaboration, and targeted support are key to ensuring the scheme remains an effective tool for fostering innovation in the UK.

A pickup truck is driving down a dirt road next to a field.
18 November 2024
from April 2025, double-cab pick-up trucks with a payload of one tonne or more will no longer be taxed as light commercial vehicles but as company cars
A gold colored rolls royce phantom is on display
5 November 2024
Most notable among the changes the tax regime was the abolition of the concept of domicile and its replacement with a “residence-based regime”.
The cover of a book titled autumn budget 2024
31 October 2024
The biggest tax increase by far was a substantial increase in Employers’ National Insurance Contributions.
Friend Partnership Logo

Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK

Share this page:

Share by: