On January 31, 2024, the National Audit Office published a report assessing Tax Reliefs aimed at stimulating economic growth. The report encompasses various reliefs, including R&D relief, Annual Investment Allowance, plant & machinery for oil and gas, Business Asset Disposal Relief, High-end Television Tax Relief, and Video Games Tax Relief. In 2021-22 alone, these reliefs were estimated to have incurred costs amounting to £14.9 billion. Remarkably, there are an estimated 341 reliefs as of 2023, with a combined cost estimate reaching £204 billion! Staggering numbers.
In this blog post, I will address the scrutiny surrounding the R&D tax relief, particularly focusing on the criticism aimed at the handling of the SME Scheme by HMRC. During the period spanning from 2015 to 2021, the cost of the scheme exceeded initial estimates by £15 billion.
The report highlights several issues with the SME scheme, including:
Some the criticisms laid at HMRC in how the SME Scheme has been managed are probably ones we are familiar with, but given that they originate from a Government Audit, they carry significant weight, hopefully urging HMRC to reconsider its current management approach:
This last one is quite scathing, “HM Treasury and HMRC must ensure that hard lessons are learned from the R&D SME relief, and that they take the steps needed to prevent such a large failure arising again.”
We know that the SME R&D scheme has been abused, and the NAO has clearly identified HMRC’s role in allowing this to occur. If I can use an analogy here, HMRC was an ostrich with their head in the sand, and from 2021 that ostrich has lifted its head and is now frantically running around in circles creating a lot of dust in its wake.
HMRC needs to listen to the stakeholders, as it claims to be doing, to address these issues in a more organised and informed manner. This is crucial to prevent unwarranted dismissals of legitimate claims based on oversimplified judgments such as “it should be easy to solve” or “no R&D here.”
The NAO did recommend opening compliance checks on older claims, which HMRC can carry out up to 4, 6, or even 20 years retrospectively, depending on the level of negligence. Presently, HMRC seems to view all claims in compliance checks as careless, which is concerning. It’s imperative that HMRC resolves the current chaotic situation, before they start adding more ‘ostriches’, making the current HMRC situation worse.
The number of staff at HMRC working on R&D compliance has increased by 328%, yet the number of compliance checks opened has surged by 627%. Coupled with the increased workload of risk assessments for new R&D claims, it’s no surprise that HMRC’s response times have ballooned from 30 days to 6 months. We think you’ll agree that’s a lot of ostriches creating tonnes of dust!
The result of HMRC’s approach is that good companies are avoiding investing in the UK or even relocating their operations abroad, as highlighted in Rufus Meakin’s article cited here. Instead of fostering R&D within the UK, this situation actively undermines the country’s economy.
If you’d like to speak to the TBAT Innovation team regarding R&D Tax Credits, SMEs or your business, get in touch today.
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