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In A Nutshell: HMRC’s 2024 Compliance Report

The UK’s Research and Development (R&D) tax relief program is all about encouraging innovative investments in science and technology, which in turn helps boost our economy through private sector funding. HMRC focuses on reducing non-compliance to ensure it benefits the companies that need it most. To tackle this, HMRC is striving to strike a balance between making sure eligible companies can access the relief they need and putting measures in place to protect taxpayer money.

HMRC’s report on the approach to R&D tax reliefs gives us an updated snapshot of errors and fraud in R&D tax claims from 2023 to 2024. Excitingly, this year, it also includes insights into customer experiences. In addition, the report shows us the new policies and operational changes that have been made to resolve common issues, like claims for ineligible expenses. It’s all about making the journey smoother for everyone involved.

Out of the £7.6 billion claimed for the 2021-2022 fiscal year, about £1.3 billion, or 17.6%, was linked to errors and fraud. Interestingly, £1.2 billion of that came from claims made by SMEs, while £134 million was related to the R&D Expenditure Credit (RDEC) scheme. The findings from MREP showed that nearly half of SME claims were not fully compliant, with about 30% being completely non-compliant.

According to the latest statistics released in September, there’s been a noticeable drop in R&D claims after the policy updates. Small and medium enterprises (SMEs) in particular saw their claims decrease by 23% in 2022-2023.

HMRC also noticed the biggest drop in claims among those with expenditures below £20,000, particularly in sectors like arts, entertainment, recreation, and hospitality, which usually don’t have many R&D claims.

Looking ahead to 2023-2024, HMRC estimates that the overall rates of error and fraud for R&D reliefs have gone down to 7.8%, with SMEs at 14.6%.

A review of R&D tax reliefs took place from spring 2021 to autumn 2023. This review resulted in the announcement of a new merged scheme during the Autumn Statement 2023. However, in August 2023, HMRC made some other key changes to improve the integrity of claims:

• Additional Information Form: From now on, every claim must include extra information. Before, about half of claimants did not provide this information.
• Digital Submission Requirement: All claims must now be submitted online. This will help HMRC review and process claims more easily.

These changes will help HMRC evaluate risks and handle claims more efficiently.

Starting in April 2024, there will be new rules about using nominations and assignments for R&D tax credit payments. R&D agents cannot receive tax credit payments for their clients through the nominations process, except in special cases. Also, new assignments for receiving R&D tax credits will not be allowed. These changes ensure that payments go directly to the claimant companies.

HMRC's strategy for managing R&D tax reliefs focuses on preventing error and fraud, promoting compliance, and responding to non-compliance effectively.

Education and Support

HMRC has launched educational campaigns to support businesses that might risk making incorrect R&D claims—especially in sectors where R&D activity is less common. They’re reaching out to industries like care homes, childcare providers, personal trainers, wholesalers, and restaurants, which often encounter questionable agents.

Here’s a brief overview of what HMRC has been doing:

1. Education Campaigns: In July 2023, HMRC sent out letters to around 7,500 care homes, sharing important information about what qualifies as R&D and offering tips on how to spot and report suspicious behaviour from agents.
2. Guidelines for Compliance: In October 2023, they released new guidelines to help businesses avoid common pitfalls, recognize eligible projects, and enhance the quality of their claims. These guidelines have been well received and appreciated by stakeholders.
3. CIRD Manual Updates: In December 2023, HMRC made updates to the Corporate Intangibles Research and Development (CIRD) manual to ensure it reflects the latest practices and guidance.
4. Webinars: To make things even clearer, HMRC has been hosting webinars. These sessions cover what qualifies as R&D, explain recent policy changes, and promote the new Guidelines for Compliance.

Overall, HMRC is dedicated to helping businesses navigate R&D claims more accurately and confidently.

Proportionate Action

HMRC assumes a focused approach to help businesses navigate R&D tax relief claims while ensuring compliance.

Whenever HMRC receives an R&D relief claim, they kick off a risk assessment process. Thanks to new information requirements, HMRC can more easily spot claims that might need a second look, which helps genuine claims avoid unnecessary challenges.

Typically, HMRC has 12 months from the date you submit a claim to open a compliance check. If any inaccuracies come to light after that period, they can still issue a discovery assessment depending on the situation.

In some instances, checks may take place after payment has been made. While this can help speed up funding disbursement, it may lead to some uncertainty for claimants about possible findings of non-compliance later on.

If an error leads to an understatement of tax or an overpayment of relief, HMRC will determine if a penalty is needed. They have a fair process for imposing penalties, focusing on whether the error resulted from a lack of reasonable care or deliberate actions. More serious mistakes can lead to higher penalties.

Collaboration with Agents

HMRC values agents' important role in helping businesses navigate the R&D tax relief system, with more than 90% of claimants using an authorised agent. While most agents offer great guidance and support, it's important to be aware that a few may provide incorrect advice. HMRC collaborates with agents and professional organisations to maintain high-quality standards in the industry.

HMRC reminds everyone that they are ultimately responsible for their own tax affairs, even when they have an agent by their side. That’s why it's a good idea to do some research when choosing an agent—check out their reviews, credentials, and any professional affiliations. Don't forget to read the terms and conditions and be clear about any fees so that you know what to expect!

While HMRC doesn’t regulate tax agents, they have set up some measures to deal with agent misconduct. These include:

• Refusing Engagement: If agents consistently don’t comply, HMRC can choose not to work with them.
• Public Disclosure of Deliberate Defaulters: HMRC might share the names of agents who are found to be deliberate defaulters.
• Penalties for Dishonest Conduct: Agents who mislead or misrepresent claims may face penalties.
• Criminal Prosecution: In cases of serious misconduct, agents could potentially face criminal charges.

HMRC has launched several initiatives to support agents and maintain high standards:

1. R&D Professional Bodies Mailbox: This is a dedicated channel for professional bodies to report concerns or breaches related to R&D tax reliefs. This resource allows HMRC to refine its compliance measures and focus on curbing undesirable practices.
2. Agent Educational Model: Launched in January 2024, this program assigns an Agent Relationship Manager to agents who have submitted multiple claims with recurring issues. The goal is to improve claim accuracy through education and support.

By keeping these points in mind, you can feel more secure in your choices and ensure that you’re working with capable and trustworthy agents.

If claimants believe that HMRC standards have not been met, they can file a complaint through HMRC’s formal procedure. If the complaint is substantiated, it may consider refunding reasonable costs incurred due to mistakes or delays. Should claimants be dissatisfied with the initial review outcome, they can request a second review by another officer. If further dissatisfaction occurs, they may escalate the matter to the Adjudicator’s Office or request intervention from their Member of Parliament.

In summary, this expanded compliance approach not only increases the likelihood of identifying ineligible claims but also fosters a more informed community of claimants. Ultimately, this leads to a reduction in non-compliance issues related to R&D tax relief claims. HMRC's enhanced compliance framework has resulted in more compliance checks, effective detection of inaccurate claims, and a higher resolution rate through agreements. The strong dispute resolution mechanisms and ongoing efforts to uphold high standards demonstrate HMRC's commitment to maintaining integrity within the R&D tax relief system.

When choosing a reputable agent, HMRC advises claimants to investigate an advisor’s reviews, credentials and governing bodies.

At Tax Cloud, we have over 20 years of experience making R&D tax claims and we have the reviews to show for it. As a member of the Chartered Institute of Management Accountants (CIMA), we’re held to a higher standard.

But we don’t stop there; we're the only R&D tax advisor 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.

Get in touch with the team to find out what we’re doing to make sure only eligible, robust claims get submitted.