HMRC’s R&D Fraud and Abuse Findings

As new legislation and compliance measures continue to reshape how claims are reviewed, businesses are facing greater pressure to evidence eligibility and maintain robust records. The latest HMRC statistics highlight a substantial shift in compliance activity, revealing non-compliance trends that raise important questions about methodology, enforcement, and the support available to innovative SMEs. This article breaks down the findings, examines the drivers behind HMRC’s approach, and explores what this means for companies claiming R&D tax relief today.

‍HMRC estimates error and fraud accounts for over £1bn of R&D claims

Earlier this year, on 17^th July, the day before new draft R&D legislation was published, HMRC released updated statistics on the level of non-compliance they have identified in research and development tax claims. Based on their findings, HMRC’s analysis stated that ‘the overall level of error and fraud for both reliefs (SME and RDEC( for 2020-21 is 16.7% (£1.13bn), which is significantly higher than the previously published estimate of 3.6% for 2020-21’.

The majority of this ‘non-compliance’ was found to be in the SME scheme, where error and fraud for 2020-21 was estimated as 24.4%. While in the RDEC incentives an estimated, much-lower, figure of 3.6% of claims were deemed to consist of error and fraud. This seems alarming. Why were the levels of non-compliance for the companies claiming SME incentives so much higher than in Large Companies?

This figure of 24.4% error in the SME incentives was based on a ‘different methodology’ for assessing non-compliance and, as such, it does not mean that the rate of non-compliance has risen. The figure is based on what HMRC have called a ‘new, more accurate methodology for measuring non-compliance’.

Some context surrounding the statistics

During the Autumn Statement in 2022, it was announced that on 1st April 2023 the RDEC rate will be increased to 20% from 13%, the SME deduction rate will be reduced to 86% from 130%, and the SME credit rate decreased to 10% from 14.5%.

Around this time, Jeremy Hunt announced his vision for the UK as a ‘silicon valley’ of innovative businesses in the coming years. Since then, the government have actively moved towards a single, monolithic R&D scheme for all claimant companies – regardless of their size. And various incremental changes to R&D tax-credits have accompanied this move towards a single scheme which more closely resembles the RDEC incentive for large companies. These large companies are likely to be most resilient in times of economic downturn; and prioritising incentives and relief-rates which favour businesses who already operate at a larger scale necessarily leaves many smaller – though equally innovative – UK SMEs paying the price.

With the transition to a single scheme which is more generous to Large companies in their sights, HMRC introduced a ‘mandatory random enquiry programme (MREP)’ for SMEs claiming under the SME or RDEC. The MREP is the basis for these figures of ‘error and fraud’. This new measure involved taking a random sample of claims to more accurately estimate levels of non-compliance. Crucially however, Large Business customers claiming RDEC were not included in this sample.

The figures and HMRC’s analysis

HMRC have said, so far in 2022-23, claims are ‘determined to be inaccurate in 84% of closed 1-2-1 enquiry cases in the SME R&D scheme. Of those R&D claims challenged and closed in 2022-23, the average additional amount due as a result of the inaccurate claim is £128,000.’

Furthermore, according to HMRC:

• Analysis of the claims examined as part of the MREP shows that a quarter (25%) of claims were fully disallowed as no qualifying R&D activity took place, although HMRC had no specific indication that the claimants were attempting to commit fraud.
• In 19% of cases, qualifying R&D activity was being undertaken, but businesses had overclaimed the relief. In these cases, some of the claim was agreed. Again, HMRC had no indication that these claimants were attempting to commit fraud.
• In 2% of the cases, there was an attempt to make a genuine claim, but there was a technical misinterpretation of the R&D legislation.
• In claims where expenditure was over £1 million, around 75% of claims were fully compliant. In smaller claims the percentage of claims being fully compliant was lower, at between 35% and 64%.
• As the size of expenditure decreases, the value of non-compliance expressed as a percentage of the value of the claim increases. In the smallest claims where expenditure was less than £10,000, over 75% of the value of the claim was non-compliant.

A closer look at the figures

In many ways, HMRC’s statistics show that they have found what they wanted to find. According to HMRC’s statistics, in claims whose R&D expenditure equated to <£10,000 (relatively low-value), only 47% of the MREP sample were found to be compliant; 27% were found to be partially non-compliant; and a further 27% were found to be wholly non-compliant. This led to HMRC’s estimated percentage of non-compliant claim-value of 78%.

As our own experience shows, there are businesses with legitimate R&D claims – businesses who have acted honestly and in the spirit that the incentives were designed to support – have had their claims rejected in their entirety by HMRC caseworkers. Where the onus is on the taxpayer to alleviate the burden of proof in support of their R&D claims – including records for its quantum of eligible expenditure – many of these companies do not have the time or resources to continue the prolonged discourse with HMRC that is usually required to resolve a compliance check.

The other problem is one of under-trained caseworkers at HMRC making decisions about a company’s R&D project. And this issue was also discussed at an HMRC consultation where Victoria Atkins MP (Financial Secretary to the Treasury) stated that the specialist R&D team focused on SME compliance ‘had more than doubled in recent years in response to the growing levels of error and fraud’. And that this ‘was part of a wider team of 245 full time equivalent staff of all grades working across a range of incentives and reliefs.’

The bigger picture: HMRC and the House of Lords

Concerns about resourcing and expertise

During a recent consultation, Victoria Atkins MP was asked whether HMRC had allocated sufficient compliance resource to R&D claims. She responded that, “At the moment, yes… at the moment we have enough.”

However, many R&D tax specialists remain concerned. They question whether HMRC’s expanding R&D compliance team has the level of training and technical expertise needed to assess complex scientific and technological claims effectively.

House of Lords: calls for clearer guidance

In a subsequent debate, the House of Lords concluded that the Government must take greater control over the narrative of what constitutes eligible R&D. They recommended that HMRC and BEIS collaborate on a comprehensive awareness campaign to give SMEs clearer, more authoritative guidance on what is – and is not – qualifying R&D activity.

Operational challenges despite good intentions

Most reputable advisers support stronger efforts to reduce abuse of R&D tax incentives. These measures are essential to ensure the relief continues to support genuine innovation.

But the operational reality is mixed. Despite the recruitment of 300 new R&D compliance staff, many SMEs making accurate claims have experienced inconsistencies in HMRC’s approach. Compliance letters frequently contain errors, incomplete explanations, or questions that do not reflect the information already supplied. In some cases, critical sections of the legislation have been misinterpreted or misquoted.

Understanding HMRC’s definition of non compliance

HMRC uses the term “non compliance” broadly. It covers everything from minor mistakes and carelessness to deliberate attempts to misrepresent a company’s circumstances. Fraud is the most serious category and requires HMRC to demonstrate that the business intentionally set out to claim money it was not entitled to.

Ongoing concerns about technical capability

The House of Lords also highlighted concerns about HMRC’s ability to accurately assess whether a project constitutes an advance in science or technology. Evidence suggested that many caseworkers lack the scientific or technical background required for these assessments.

In response, the House recommended that HMRC and BEIS work together to strengthen access to specialist expertise to ensure claims are evaluated consistently and fairly.