HMRC’s approach to target error and fraud within the UK R&D tax regime

HMRC estimate the cost of error and fraud at £1.13 billion and are targeting the perceived abuse of the R&D tax regime

Estimated cost of error and fraud at £1.13 bn

HMRC are using several means to target non-compliance within the Research & Development (R&D) tax regime. These include: (a) increased compliance activity into existing claims; (b) introduction of the mandatory Additional Information Form for future claims; and (c) proposals for a new and ultimately merged R&D tax regime with the stated aims of introducing simplification and better compliance.

HMRC continue to target fraud and error within the R&D tax regime. They are using various means to do so, which will affect existing and future claims.

Increased compliance activity

HMRC have opened more enquiries into R&D claims in the last 12 months and c.20 percent of the value of all R&D claims are said to now be under enquiry. 

This appears likely to continue for the foreseeable future given the level of errors HMRC have found. Consistent with their approach more generally, HMRC’s ask of claimants is increasingly forensic with claimants required to provide more detailed information and explanation to justify their claims. HMRC are also asking for more technical documentation to justify the eligibility of all projects claimed, and far more granular detail of the financial information for R&D costs claimed. For claimants used to a more ‘light touch’ approach to R&D claims, these enquiries may come as a surprise and are likely to be much more time consuming to deal with than historic enquiries that they may have experienced (if indeed they have had a previous R&D related enquiry at all).  

Future claims – Additional Information Form (AIF)

Going forward companies are required, for all claims filed on or after 8 August 2023, to submit an AIF as part of making an R&D claim. The AIF requires companies to prepare between three and 10 technical descriptions of the projects, provide details of the company’s agent and a named officer responsible for the claim, along with other prescribed details. The AIF is a web-based form and must be filed on-line prior to the R&D claim being submitted in the usual way on a tax return. This is being used by HMRC to risk assess claims (i.e. review the sector, quality of information and identify the agents) and importantly, if the AIF is not submitted before the R&D claim, then HMRC have the powers to remove the R&D claim entirely from the company tax return. This will undoubtedly increase the administrative and technical burdens on claimants and their advisors when considering and making R&D claims.

A new merged R&D regime

Draft legislation, as part of an ongoing consultation on the R&D regime, was issued over the summer for a new single merged R&D scheme for all claimants, largely based on the current R&D Expenditure Credit (RDEC) scheme. A decision is expected in the Autumn of this year as to whether the Government will proceed with a merged scheme. It is currently proposed that any new regime will apply from 1 April 2024 onwards. Whilst there are many nuances and issues pertaining to the draft legislation, most feedback received from claimants relates to the proposed ‘subcontracted’ and ‘subsidised’ expenditure rules. The proposed changes are expected to reduce the number of R&D claimants considerably and concentrate the R&D tax relief in the hands of companies that are at the top of the R&D supply chain or undertake ‘internal’ R&D.

HMRC’s targeting of the abuse within the R&D regime is to be welcomed. However, the measures highlighted above will impact genuine R&D claimants. Claimants face   greater risk of HMRC enquiries on their existing R&D claims, and significant extra compliance costs for likely smaller credit for future claims, with the result being less certainty for R&D incentives and future investment in innovation within the UK. The current timetable announced by the Government for a new merged regime risks enacting flawed legislation that could have longer term implications for companies undertaking R&D within the UK.

So, what should taxpayers be doing in response to HMRC’s focus on R&D tax claims? It will be increasingly important to collect and document evidence of R&D activities in a timely fashion, and that the methodology behind R&D calculations are reviewed to ensure claims are robust and compliant with the AIF. The timing of the completion and submission of the AIF will need to be factored into the company tax compliance cycle as the AIF must be filed before the tax return containing the R&D claim is filed. Taxpayers need to be aware that some of the information required to complete the AIF may need to be obtained from third parties e.g. employer PAYE references for Externally Provided Workers. Lastly, taxpayers should early on seek professional advice from R&D tax specialists to understand the risk profile of their claims and help pre-empt enquiries or to deal with enquiries from HMRC.

At KPMG our tax and legal colleagues work together in a multi-disciplinary team with a view to ensuring that R&D claimants claims are robust, the risk of intervention by HMRC is minimised and should HMRC raise an enquiry, this is progressed to successful resolution.