National Audit Office Issues Damning Report on R&D Tax Relief
At the end of January, the National Audit Office (NAO) released its Tax Measures to Encourage Economic Growth report, commenting on the cost and effectiveness of tax reliefs intended to promote economic growth. The report considered:
- to what extent HMRC has improved its assessment of the costs of non‑structural reliefs;
- whether HMRC has proportionate and timely monitoring and evaluation of whether objectives are being achieved;
- whether HMRC assesses and monitors the risk that tax reliefs are misused and acts sufficiently quickly to respond where abuse arises; and
- whether HM Treasury and HMRC learn and apply lessons from experience to minimise the risk of abuse and meet objectives in an administratively efficient way.
In 2023, the UK had 341 structural tax reliefs intended to achieve economic or social objectives. However, it was R&D tax relief which took centre-stage within the NAO’s report. The document contains damning commentary on spiralling costs and the fraud within R&D tax relief. We take a brief look at a few of the key findings.
Cost to the Exchequer
The initial 2016 SME scheme forecast produced for the Office for Budget Responsibility (OBR) expected R&D tax relief to cost £6.3 billion in cash terms from 2015-16 to 2020-21. In practice the scheme cost £18.6 billion during this period, £12.3 billion (196%) more than expected.
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.
In the face of high costs, an externally commissioned report from November 2020 started to question the effectiveness of the schemes. The report concluded that the amount of additional R&D expenditure stimulated for every £1 of relief was between £0.75 and £1.28 in the case of a claim for a profit-making SME and between £0.6 and £1 for a claim from a loss-making SME.
The spiralling costs, and perceived ineffectiveness of the schemes, prompted the NAO to begin looking elsewhere for explanations. What was found, was startling.
Fraud in the System
The report outlines how, for several years, the R&D tax relief system was riddled with fraud and error. In October 2022 HMRC’s own analysis of the SME relief covering 2015-16 through 2018-19 found that 74% of the growth during this period could not be explained by either relief rate changes or growth in the economy. However, there are still gaps in HMRC’s understanding of the scale involved. The NAO states HMRC does not know how far back large-scale error and fraud has occurred on the R&D SME relief.
The report also outlined that around 90% of R&D claims involve an agent. While many are reputable tax advisers, unaccredited ‘agents’ aggressively target potential claimants of R&D reliefs and market themselves to small businesses on the basis that far more business activity was eligible for the relief than was the case, and payments would not be checked. The problem was particularly acute with the smallest claims.
Of significant note was the statement which highlighted that ‘HMRC has underestimated the level of error and fraud for some years, and compliance work on older claims may be worthwhile despite the costs and difficulties’. This indicates that HMRC may be considering challenging older claims (i.e. outside the normal 12-month window of enquiry) on the basis that a deliberate attempt to make a fraudulent claim has been made. This would mark a significant departure from the current R&D enquiry landscape.
The report provided a sobering conclusion and one which senior figures at HMRC will no doubt take heed. It stated, ‘HM Treasury and HMRC must ensure that hard lessons are learned from the R&D SME relief, and that they take the steps needed to prevent such a large failure arising again’.
It’s our view that HMRC simply did not heed the many warnings which were being sounded by the credible adviser community. Warnings were being communicated several years ago and it’s fair to say that between the late 2010s and the early 2020s, the scheme was being abused on an industrial scale. The NAO picks up on this matter, taking aim at HMRC’s apparent blindness to the problems. It states ‘HMRC was still concluding as late as 2020-21 that the increases above forecast were due to unexpectedly high take-up by eligible claimants on grounds of increased attractiveness and awareness’. This was blatantly not the case.
Damning NAO reports regarding HMRC’s ineffectiveness at managing R&D tax relief have previously prompted major changes in how the relief is administered. We suspect this report will act as a new catalyst for further action.
YesTax. Positively Better.