The HMRC’s R&D tax credit scheme, launched to drive innovation, has faced significant challenges.
- Reports indicate over £4.1 billion lost to fraud and errors from 2020 to 2024.
- Claims have included dubious innovations, from window cleaning to corporate website redesigns.
- A House of Lords subcommittee heard agents referred to the scheme as ‘free money’.
- HMRC pledges increased scrutiny to recover lost funds amidst rising non-compliance.
The R&D tax credits scheme, initially designed to foster world-class innovation, has been significantly undermined by fraudulent and erroneous claims. These claims encompassed a range of questionable innovations, such as a window-cleaning company’s technique to elevate a water bucket, a pub’s addition of vegan and gluten-free menu options, and various corporate website redesigns.
From 2020 to 2024, HM Revenue and Customs (HMRC) has estimated that fraud and errors within the scheme have amounted to over £4.1 billion. The 2023-24 financial year alone saw relief expenditure reach £7.7 billion. This troubling revelation emerges as Chancellor Rachel Reeves commits to cracking down on tax fraud, with Labour aiming to recover £5 billion in tax revenue by the end of the current parliamentary term.
Tax officials have sternly labelled the levels of fraud and error within the R&D tax credits scheme as ‘clearly unacceptable’. Public action and stricter oversight have been promised. Colin Hailey, a technology tax expert, provided testimony to Parliament, highlighting significant abuse within the scheme. He criticised HMRC’s inadequate vetting processes and the considerable commissions taken by agents filing these dubious claims.
Hailey’s account revealed a landscape plagued by deceptive practices, where agents aggressively solicited businesses, including care homes, pubs, fitness centres, and dental clinics, encouraging them to apply for R&D tax credits. Specific instances include a tax consultancy claiming to have saved a hotel and pub in Chester £28,000 due to ‘innovative menus’. However, the legitimacy of such claims remains unverified by HMRC.
Introduced in 2000 as a measure to counteract Britain’s declining R&D spending, the scheme intended to reduce corporation tax or provide direct payments for legitimate technological or scientific advances. Yet, HMRC’s annual accounts report an alarming cost of £1.127 billion from fraud and error in 2020-21, £1.337 billion in 2021-22, £1.051 billion in 2022-23, and £601 million in 2023-24.
Estimates from 2021-22 indicate that approximately one-quarter of claims from small and medium-sized enterprises contained errors or fraud, making it one of the highest non-compliance rates across government expenditure programmes. In response, HMRC has intensified its efforts to examine claims meticulously and increase compliance inquiries, aiming to claw back part of the lost billions.
An HMRC spokesperson emphasized the agency’s commitment to stringent scrutiny, particularly where ‘public money is at stake.’ The spokesperson stated, ‘We generated a record £843.4bn in tax revenues last year, up 3.6% on the previous 12 months. With R&D claims, public money is at stake, and taxpayers rightly expect us to scrutinise them.’ This statement underscores HMRC’s renewed focus on enhancing guidance, refining processes, and taking decisive action against those exploiting the scheme.
HMRC is committed to tightening controls on the R&D tax credits scheme to address and rectify the significant fraud and non-compliance issues identified.
