A Statistical Breakdown on R&D Tax Error and Fraud

In 2020, HMRC began an investigation into the rate of error and fraud in the R&D tax credit scheme. This investigation increased the level of compliance checks opened dramatically. This resulted in many claims being rejected and a delay in payouts as HMRC worked to keep up with the backlog.

On October 30, 2024, HMRC released a comprehensive analysis of this investigation. The report examines the SME and R&D expenditure credit (RDEC) schemes for R&D tax relief.

How does HMRC monitor error and fraud?

The value of and proportion of claims with estimated errors and fraud is monitored through Mandatory Random Enquiry Programme (MREP) audits.

MREP involves a random selection of tax relief claims submitted by SMEs for a thorough review. It ensures an unbiased sample that reflects the broader population of claims. This helps HMRC establish accurate estimates of error and fraud rates across the board.

The objectives of MREP audits are to gather data that will improve the accuracy of the tax relief schemes, evaluate risk areas, and identify common compliance issues. The insights from MREP help HMRC to refine compliance strategies and focus resources on high-risk areas, adjust guidance and educational resources for claimants and develop policies targeting sectors or claim types with high non-compliance rates.

Three MREP audits have been conducted; the first was between 2020 and 2021 (results published July 2023); the second covered 2021 to 2022 and was published in July 2024; the third is underway.

Outside of the MREP audits, HMRC will carry out risk assessments on all claims, using information required on the Additional Information Form. This should reduce the number of valid claims that are queried and ensure potentially ineligible claims are spotted, without relying on the random enquiry process of MREP.

What are the results of HMRC’s audits?

HMRC’s current estimates show a significant decrease in error and fraud rates. From 2020 to 2024, the estimated value of non-compliant claims in SMEs significantly decreased, dropping from £1,203 million in 2021-22 to £475 million in 2023-24. The overall error and fraud rate fell from 16.7% in 2020-21 to an estimated 7.8% in 2023-24.

Further Insights from MREP Data

HMRC's analysis provides crucial insights into claimant behaviour, expenditure patterns, sector compliance, the experiences of first-time claimants, and the role of agents.

Customer Behaviour

The analysis indicates that around 90% of non-compliance cases arise from misinterpretations or ineligible claims, rather than instances of outright fraud, which occurred in fewer than 10% of cases.

The completed MREP audits revealed similar results in terms of compliance. Due to the delay between the start of the MREP audit and the conclusion of the compliance checks and, thus, the data required, the results following the introduction of compliance measures have not yet been seen. HMRC expects a decrease in ineligible claims.

Size of Expenditure

The data reveals that larger claims have a higher compliance rate. Claims exceeding £1 million have a compliance rate of 75%; smaller claims (those under £1 million) are more likely not to qualify on inspection, ranging from 29% to 58%.

This significant compliance gap between larger and smaller claims underscores the need for enhanced guidance regarding qualifying R&D activities for smaller enterprises.

Sectoral Trends

The findings highlight variations in compliance rates across different sectors.

The manufacturing and professional services sectors demonstrated the highest compliance rates, at 85% and 80%, respectively. In contrast, sectors such as accommodation, catering, and wholesale reported markedly lower compliance rates, with some figures going lower than 40%.

This may be down to a misunderstanding of the eligibility criteria. At Myriad, we often find potential claimants can be misled to believe that any kind of product development is R&D. One of the key elements of R&D is advancing the field of science or technology – if your product isn’t advancing scientific or technological principles, it won’t qualify.

HMRC does not expect to see large claims (in volume or value) in the arts, entertainment or hospitality. As such, HMRC began a campaign to reiterate the qualifying criteria to such sectors. This is to combat the efforts of unscrupulous agents who push non-qualifying companies to make a claim in order to collect their fee.

First-Time Claimants

The analysis shows that first-time R&D tax relief claimants exhibit a higher rate of non-compliance, with 64% of the total claimed value categorised as at least partially non-compliant, of which 46% of claims were entirely non-compliant.

This indicates a pressing need for enhanced education and support mechanisms for these applicants.

Role of Agents

HMRC recognises agents play a vital role in the R&D tax reliefs regime with more than 90% of claimants having an authorised agent to act on their behalf.

Approximately 54% of companies use the services of specialist agents. HMRC found that claims associated with affiliated tax practitioners were more compliant than those processed by unaffiliated agents.

As such, HMRC ran a consultation on increasing standards for tax agents and released their guidance for companies to follow when choosing a tax agent.

HMRC’s guidelines encourage companies to:

• Check which specific tax services they offer
• Review the legal contract or terms and conditions fully
• Confirm fees and how and when you should pay
• Read reviews to confirm their reputation
• Check they are registered with HMRC and that they are aware of HMRC’s agent standards
• Ask if they have any professional qualifications or are a member of an accountancy or tax professional body

How is HMRC combatting error and fraud?

HMRC introduced a variety of well-publicised measures designed to increase compliance in the R&D tax relief schemes.

These include:

• For accounting periods beginning on or after 1^st April 2021, there is a cap on the size of claims directly proportional to their PAYE costs
• For all claims from August 2023, claimants must provide specific contacts for the company officer and any advisors involved in preparing or submitting the claim
• For all claims from August 2023, claimants must provide an “Additional Information Form” (AIF) which includes details about the projects claimed
• For claims made on or after 1^st April 2024, payments can no longer be made to a third party and must go to the claimant's account (similarly, nominations cannot be made either)
• For accounting periods beginning on or after 1^st April 2024, first-time claimants or those who have not made a claim for more than 3 years must submit a claim notification form

HMRC is intent on stamping out error and fraud and, to this end, has increased personnel working on compliance by 400% (from 100 in 2021 to over 500 currently). These reviewers work with a risk-based approach with an emphasis on SMEs.

Summary

With HMRC’s emphasis on compliance and its associated legislative changes, it can feel like a minefield trying to avoid a letter through the door. Some claimants, new or well-versed in the schemes, will already have had a claim rejected. However, the work done by HMRC to reduce error and fraud in the scheme has already identified £441 million incorrectly claimed in the 2023-24 tax year. In the 2022-23 tax year, compliance checks recovered £288 million for the taxpayer.

Ultimately, the best way to avoid a compliance check is by preparing your claim carefully to begin with. Alone or with a specialist advisor, you are at risk of your claim being selected in a MREP audit, therefore all claims need to be defensible at every stage.

How Myriad Can Help

At Myriad, we're not just another tax incentives consultancy. We're the only one that eliminates your risk.

Our promise to you is simple: we stand firmly behind our advice. If a claim submitted by us is challenged, we'll defend it free of charge. If it is rejected, we won't charge you any fees. We'll cover any HMRC penalties and even compensate you for your time.

Navigating the complexities of R&D tax relief can be challenging, especially for businesses focused on growth and innovation. This is where partnering with experts like Myriad can be invaluable.

With our deep understanding of HMRC requirements and experience across various industries, we can help you:

• Identify all eligible R&D activities
• Implement robust documentation processes
• Maximise your claim by capturing all eligible direct and indirect costs
• Prepare thoroughly for potential HMRC audits, ensuring your claims are defensible and well-substantiated

By leveraging our expertise, you can focus on what you do best – innovating and growing your business – while we ensure you receive the maximum R&D tax relief you're entitled to. Whether you're a startup scaling rapidly or an established enterprise looking to optimise your tax strategy, Myriad has the knowledge and experience to support your R&D tax relief needs.

Please message or call us on 0207 118 6045 to learn how we can assist you with your R&D tax credit claims or HMRC enquiries.