Forthcoming Research and Development (R&D) tax relief reforms by the UK government are unlikely to succeed in preventing spurious claims, due to a lack of resources and expertise, a parliamentary inquiry has found.
The report, published by a House of Lords economic affairs committee on Tuesday, is critical of fresh compliance changes for R&D tax relief, arguing that they lack focus and would be ineffective “in isolation”.
“Reforming the tax relief in itself isn’t enough,” Lord Leigh of Hurley, chair of the Economic Affairs Finance Bill Sub-Committee, tells Accountancy Age.
“HMRC has come up with some ideas for compliance, which are put back onto the taxpayer, but what we’d like to see is HMRC putting more resource into ensuring that compliance works.”
The sub-committee’s report is formed of views gathered from an industry consultation phase and focuses on the R&D reforms included in the UK government’s latest draft Finance Bill. These come on the heels of an estimated £469m in R&D-related error and fraud in the 2021/22 financial year, representing a 40% year-on-year increase.
Among the reforms are the requirements to provide more detail regarding R&D tax relief claims, name any tax adviser involved, and have the claim endorsed by a senior officer of the company.
Mitigating error
But according to the sub-committee’s report, the government must take “a more focused and targeted approach to identifying suspect claims”.
The report specifically criticises the “process now, check later” approach of the current regime. It argues that areas such as improved guidance and communications to businesses could enable them to mitigate any errors before a claim is made.
“The way the system works at the moment is HMRC first pays out and then investigates afterwards. And of course, when HMRC attempts to recoup the money, the taxpayer may be there but the agent has disappeared,” Hurley says.
“We think that HMRC should clarify that this is a payment which is subject to subsequent review.”
The report is also critical of the government’s proposal to refocus relief activity to expenditure in the UK rather than offshore. Instead, the sub-committee argues for a form of “transitional relief expenditure” for specialised resources not currently available in the UK
The government must take the opportunity to look beyond the draft Bill and consult on how the scheme can be improved, it concluded.
More recently, the government also launched a consultation on proposals for a single programme to replace the two existing R&D tax relief schemes: the Research and Development Expenditure Credit (RDEC) and the SME scheme.
The new regime would seek to provide decision makers in smaller companies with clearer information to help them set budgets for R&D. In contrast, under the current setup, the exact amount of money a firm will receive from SME tax relief can only be determined at the end of the accounting period.
But according to Hurley, the move to merge the two “very different” schemes may be counterproductive.
“They’ve gone out to consultation, but all they’ve done this for is to ask how that should be done – they haven’t set up a consultation to say should it be done.
“We think that they might’ve asked the SME community if it’s a good idea.”
Ensuring R&D remains ‘fit for purpose’
Echoing the views of the sub-committee’s report, the ICAEW’s head of business, Simon Gray, argues for swift and concrete action to ensure the approval of more “legitimate claims”.
“It’s critical the government considers measures to combat those abusing the system,” he says.
“Further investment for HRMC to improve dialogue with businesses and ensure more legitimate claims are processed quickly would be a positive first step.”
Also endorsing the report’s findings, Jenny Tragner, director and head of policy at R&D consultancy ForrestBrown, says that the government can make an “ambitious statement of intent”, acting as a “call to arms for the UK’s innovative companies”.
“The Committee’s recommendations would help to ensure the incentive remains fit for purpose, supporting the UK’s ambition to be a science and technology superpower,” she says.