HMRC urges tax relief over-claimers to come clean

HMRC has opened a new disclosure service for companies that may have overclaimed R&D tax relief in past years.

The new service has been launched in response to concerns about the high level of error and fraud in R&D claims.

In 2023, HMRC published an analysis of R&D claims from 2020-21 which estimated that almost a quarter (24.4%) of claims by value in the SME scheme and 3.6% of claims in the larger company (RDEC) scheme were either incorrect or fraudulent – with a combined cost to the Exchequer of an estimated £1.13bn.

The new R&D disclosure service is open to companies that have claimed too much R&D relief in error but are out of time to amend their company tax return.

However, the service is not available to companies whose behaviour was deliberate. This would include instances in which companies knew they owed tax or had overclaimed R&D tax credits but chose not to tell HMRC, or where the claim was deemed fraudulent by HMRC because the company activity did not qualify for the relief at all.

In September eleven people were arrested at locations around the country on suspicion of tax relief fraud, following raids by HMRC officers as part of a coordinated operation to tackle suspected abuse of the research and development (R&D) tax relief system.

However HMRC declined to comment: “We do not comment on identifiable taxpayers.”

The new initiative is designed to encourage voluntary compliance, but according to HMRC’s latest annual report they are getting much tougher on historic R&D tax relief claims. The latest figures published in August 2024 showed that the tax under consideration in R&D investigations being carried out by HMRC’s Wealthy and Mid-sized Business Compliance Directorate had doubled over the past year to reach £641m in 2023/24.

Dawn Register, a tax dispute resolution partner at BDO said: “HMRC’s own research shows a high level of historic fraud and error in R&D claims. While the rules for new R&D relief claims were significantly tightened recently – some might say overtightened making it difficult for genuinely innovative SMEs to access support for R&D – this new service is designed to encourage companies with historic inaccuracies to come forward.

“However, the restrictions on the use of the service and the lack of any incentives – such as protection from criminal prosecution or additional time to pay – may mean that this service is unlikely to prompt the level of response that HMRC is looking for. Launching this on New Year’s Eve won’t have helped awareness either.

“There are also other disclosure routes available to companies looking to bring their tax affairs up to date. In practice we have seen companies approached by many unscrupulous “claims” agents operating in the R&D market in recent years. If a company now realises that past R&D claims prepared for them by such agents were, shall we say, “speculative”, then a voluntary disclosure is certainly the way forward.  However, they should always seek specialist advice from tax dispute specialists about putting things right, including the most appropriate route to use in approaching HMRC.”

Peter Clark, R&D Technical Director and Co-founder at RCK Partners, a tax consultancy that specialises in R&D tax relief, said such a highly complex area of tax meant it has been easy for companies to get things wrong, especially when they don’t have the right expertise or advice.

“HMRC is now taking a considerably more robust approach in launching investigations and this is partially why they are launching the new disclosure service.

“We strongly encourage claimants who are concerned they may have previously filed claims containing errors to seek advice. Doing this promptly will help them understand their position and if they need to make a disclosure, then doing so proactively can help their business avoid unnecessary penalties.

“It is also worth noting that this new facility should only be used if the company is out of time to amend its corporation tax return and if the business feels there are errors within its original R&D claim. It’s important for claimants to understand there are various disclosure routes and so expert advice is crucial.”