July 2023 HMRC Update

Biannually HMRC hosts the Research & Development Communications Forums (RDCF), which is a great opportunity for R&D tax advisors to hear from HMRC about the latest developments, operational performance and strategy around the R&D tax reliefs, the SME and RDEC schemes. 

On the 26th of July, an online meeting took place, attended by more than 200 participants. During the session, HMRC provided valuable insights and updates on various topics and attendees had the opportunity to ask questions and engage with HMRC on these matters. Topics included:

• Scheme Fraud and Error 
• Potential Scheme Merger
• Operational performance and targets 

Scheme Fraud and Error

For the past two years, HMRC has been running a campaign, aimed at tackling error and fraud within the R&D relief schemes, with a particular focus on the SME Scheme. This was launched due to concerns that up to 10% of claims, amounting to an estimated £336 million, were associated with error or fraudulent activities.

In early July 2023 HMRC released some new stats established out of their Mandatory Random Enquiry Programme (MREP) for SMEs. TBAT acknowledges and supports HMRC’s endeavours to ensure the authenticity of claims. Nevertheless, we believe that the current random selection process has led to a situation where numerous legitimate claims are being tied up in bureaucracy and lengthy discussions, sometimes taking up to 2 years for approval. As a part of their efforts to address this issue, HMRC has significantly increased the number of compliance check caseworkers by adding 300 additional staff to their team. In addition, a new R&D Anti-Abuse Unit was established in July 2022 to tackle incorrect claims and open enquiries into the more complex cases. To date HMRC has reported they have blocked £85million in fraudulent claims, challenging over 2,500 suspected claims and even arrested 9 people. 

As part of this data release HMRC now estimate the level of error and fraud in the SME and RDEC schemes at a massive £1.13billion, with the majority of this in the SME scheme of £1.04billion. This figure was derived from a sample of 500 random enquiries conducted on claims subjected to a compliance check, out of a total of 89,300 claims (representing a sample rate of 0.55%).

At the RDCF in late July, HMRC released some more information about the results of this increased estimate on error and fraud. It is HMRC’s estimate that fraud represents 5% by value of the £1.13billion, or £56million. The remainder being errors in claims, with a surprising 18-74% (range depends on claim value) of all claims either wholly or partially non-compliant by value. Surprisingly, if an agent is involved in the claim then this non-compliance is 15-90% (on a range of claim sizes).  

In our opinion, there may be a number of factors influencing this:

• TBAT has observed the use of highly assertive language in letters sent by HMRC to clients. Such an approach may discourage many legitimate claimants from pursuing their cases, as they may perceive it as not worth the fight.
• HMRC’s interpretation, questions and decisions based on the DSIT guidelines are mis-interpretating these in many occasions contrary to the CIRD manual. TBAT strongly believes this and will continue to present evidence-based claims on sound R&D. 
• The Chartered Institute of Taxation (CIOT) has sent an excellent letter to HMRC, addressing the same concerns that TBAT has also observed. HMRC is expected to respond to this letter in early August, and it will be interesting to see their response.
• With the compliance checks that TBAT have completed, 78% by value have been accepted with no adjustment in value – No Error or Fraud found. The other 22% by value are ongoing. Hence we are surprised at the levels on non-compliant claims supported by an agent. 
• HMRC stated that 12 of the 500 closed the enquiry process, with companies accepting wholly non-compliant claims. TBAT believes that the tactics employed by HMRC may have resulted in a significantly higher number of companies giving up the fight against HMRC’s questions.
• Statistically a 0.55% sample group to extrapolate a £1.13billion error and fraud is quite a small sample size (10% would be better!) 

This leads me to the conclusion that HMRC are using small random samples, aggressive tactics and poor interpretation of the DSIT guidelines to create a deal of uncertainty in the R&D community around making a claim. They appear to see this as a win!

Potential Scheme Merger

In the Chancellors’ Autumn Statement in August 2022, it was stated that the government wanted to maintain competitiveness in R&D schemes, with the potential to combine the schemes into one. A consultation was launched in January and closed in March 2023. A summary of responses to this consultation was issued earlier this month. 

At the same time as the release of the responses, draft legislation was also released as part of legislation day 2023. 

The current intention is that a merged scheme of the SME and RDEC will operate from 1st April 2024, though HMRC are seeking further feedback on the legislation, and are keen to engage with stakeholders to gain their views. The proposed merged scheme would be an RDEC style above the line credit. This is becoming common practice, as recently the creatives tax reliefs (Video Games, Orchestra, High-end television etc) have also been proposed to move over to an above the line RDEC style credit. 

Operational performance and targets

To date for the 2022-2023 fiscal year (April to March) HMRC have received a total of 43.577 SME claims and 9,659 RDEC claims, a modest 1% increase from the 2021-2022 period. 

HMRC has a target currently of processing 90% of these within 40 days. However, it’s important to note that processing, in this context, simply means the initial handling of the claims, not their review and approval. Some claims might undergo a compliance check at a later stage. So far, HMRC has been successful in meeting its target, achieving a 92% processing rate during the December/January period and a 91% processing rate in the March/April period. Both of these are high demand periods for HMRC, with high numbers of accounts and claims being submitted.  

In the future, HMRC is planning to aim for an 85% processing rate of claims within 40 days, which might seem puzzling considering they are already achieving the current, more stringent target successfully. One speculation could be that they are considering reallocating resources, but the exact reasons behind this change remain uncertain.

Summary

There are more changes to come, with the prospect of a single RDEC type scheme, but for that not to be abused (I do believe that abuse of the schemes is currently too high) HMRC needs to show they are in control of claims being processed. There is too much pay now, ask questions later, which creates huge uncertainty for the business, and we are seeing some consequences with some of our clients. HMRC needs to gain control, but the manner in which they are doing so is too aggressive and with poor understanding and interpretation of their own laws, guidelines and manuals. I describe it  aggressive because when you receive the first letter from HMRC accusing you of committing fraud based on a legitimate R&D claim without any supporting evidence, it is undeniably aggressive in nature.

Currently, HMRC are presenting challenges, but there’s also a sense that they are open to hearing others’ opinions. Let’s hope they make the right decisions moving forward.

TBAT Innovation is holding a follow up Webinar on the 12th September, which will be an update from our previous webinar “HMRC urgent changes to R&D tax claims”, designed to provide your business with the crucial information needed moving forward. 

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