A quarter of research and development (R&D) tax relief pay-outs to small firms has been lost due to fraud and error, HMRC has admitted.
Of the two R&D tax relief schemes it operates, the one for small businesses (SME) was responsible for £1bn, with one in four claims made either in error or fraudulently. The equivalent scheme for larger firms (RDEC) lost £100 million, bringing total losses to the tax authority between 2020 and 2021 to £1.1 billion
It was initially estimated that 5.5% of the total pay-out was lost; however, that figure has been revised upwards to 24.4%.
HMRC said that although the schemes were “a vital driver of innovation”, it admitted that “the levels of non-compliance are clearly unacceptable. We are introducing new measures to address these issues.”
Akshay Thaman, IP Consultant & Policy Lead at advisory firm GovGrant said: “The R&D tax relief schemes were set up to promote growth, through incentivising R&D and it is clear that the current scrutiny is impacting business confidence. For small businesses, the risk of an enquiry process renders the benefit of the scheme redundant as it is too time consuming and costly to defend even when there is clear compliant activity.
“GovGrant has consistently voiced concerns (including to HMRC and the government more generally) that the policy direction and HMRCs approach to enquiries has grave consequences for any small business carrying out compliant R&D and who rely on the tax relief to continue their innovation.”
