NAO's findings on R&D tax relief expenditure and oversight

On 31 January 2024, the National Audit Office (NAO) published a wide-ranging report on the government’s tax measures to encourage economic growth. They assessed the impact of the schemes, HMRC’s administration and risk management, compliance and value for money.

Across the 63-page report and accompanying press release there was a heavy focus on R&D tax relief, and particularly the SME scheme. It is fair to say that the NAO pulled no punches. They reported:

• The R&D relief for SMEs cost around £15 billion more than HMRC expected between 2015-16 and 2020-21.
• There is no meaningful public reporting by the government where tax reliefs greatly exceed the expected cost.
• HMRC underestimated the level of risk and compliance work necessary for R&D SME relief for some years.
• HMRC estimates that the most likely level of error and fraud on the R&D SME relief was 24.4% (£1.04 billion) of expenditure in 2020-21.
• HMRC does not know how far back large-scale error and fraud has occurred on the R&D SME relief, but the cost of the R&D SME relief increased by nearly 575% in cash terms between 2013-14 and 2021-22, when it cost £4.76 billion.
• An evaluation of the R&D SME scheme led to a policy decision to reduce it from April 2023, a move forecast to lead to a net reduction in costs of £4.5 billion between 2023-24 and 2027-28.

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The wider impact on UK tax

As previously mentioned, the report took into account more than just R&D tax relief. For context, it cited that as of December 2023 the UK had 341 “non-structural” tax reliefs intended to achieve social or economic objectives.

In 2022-23, looking at all of these reliefs for which HMRC had multi-year data (which was 104 schemes), they cost the Treasury £204 billion. This is equivalent to more than 25% of all tax revenue in that tax year.

What does the assessment of R&D tax relief mean?

It’s evident that given the reported magnitude of error and fraud, along with insufficient controls and excessive spending, there’s a pressing need for change. Indeed, changes have already been implemented, as we’ve detailed in earlier posts of our blog in previous months.

The report provided a helpful summary of these points:

On accurate risking

HMRC has already introduced a mandatory random enquiry programme to help them better understand the risk of error and fraud. Since August 2023, HMRC have also brought in new reporting requirements to collect better data about all claims.

On forecasting

HMRC has changed the way it forecasts reliefs like R&D tax credits to better predict uptake after underestimating scheme usage for so long.

On stronger financial controls

The previous stance on dealing with a high volume of claims was to “process now, check later” with a KPI of handling 95% of claims within 28 days. This has been altered to 85% of claims within 40 days, giving them more time to spend on claims. The number of staff working on risk-based compliance cases increased by 230% in 2023 rising from 88 to 289, and more training was provided. This led to 627% more cases being opened.

Additionally, in 2023 HMRC introduced two new control measures. In April they required first time claimants and companies who had not claimed R&D relief for more than three years to pre-notify HMRC of their intention to claim within six months of their period end. And since August it has been a requirement to submit claims digitally, including more information including the endorsement of a senior manager.

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On tackling rogue agents

Since August 2023 businesses are required to notify HMRC of any agents involved in a claim, and they are putting a greater obligation on claimants to report suspicious behaviour of agents.

On government policy

The SME scheme has largely been rolled into RDEC, simplifying overall administration and, in most cases, reducing the level of generosity which had previously been offered to SMEs.

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Kene Partners’ views on the findings

There is much to digest in this report, and we believe it is crucial to comprehend the implications and its potential impact on businesses engaging in R&D activity.

The biggest takeaway is to ensure that you are working with a reputable adviser like Kene Partners – one who will optimise your claim, but not overstate it as has clearly been happening on a very large scale through error and even deliberate fraud.

Through stricter processes like digital submission and pre-notification, it has already become a stricter process to initiate a claim, and the significantly enhanced compliance team with HMRC will ensure there is much less room for submitting an incorrect claim.

Although it will take more time, this is positive as fraudulent claims are bad for the majority of businesses which are law-abiding; so we are right behind HMRC in clamping down on such claims and any rogue agents who are encouraging them.

We do note that the report could not issue definitive conclusions on how far back the large-scale error and fraud occurred. Retrospective checks going back years were not ruled out, subject to a cost/benefit analysis to the Treasury.

We are passionate about sharing our technical expertise, essential HMRC insight and unique client-first approach with innovative businesses who want to benefit from R&D tax relief. If this article has raised any concerns for you or you would just like to find out more about how we can help, please contact us.

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