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HMRC increases R&D tax claim scrutiny

HMRC R&D claims Image credit: Claudio Divizia / Shutterstock

From today HMRC is imposing further measures aimed at reducing false claims for research and development (R&D) tax relief, prompting concerns that the extra red tape could deter genuine innovation.

Businesses now have to fill in an “Additional Information Form” to combat an estimated £1.3bn of error and fraud. Firms applying for R&D tax relief will now have to notify HMRC which agent they used in the claims process.

The changes come ahead of further reforms to the UK’s R&D relief scheme.

“For the many businesses that are genuinely carrying out groundbreaking R&D, the changes being introduced from today may seem overly bureaucratic, particularly for large groups submitting multiple claims,” said Carrie Rutland, innovation incentives partner at auditor BDO.

This was echoed by Sarah Barber, CEO of investment firm Jenson Funding Partners, who said that those making legitimate claims would “suffer”.

Barber said: “The additional cost of having to use experts and additional time they are spending on them, rather than establishing their businesses, is more a tax on innovation. Does it actually deter the people who are misusing the system? I don’t think so. Claims are taking significantly longer now with more enquiries into claims, which is unlikely to streamline the process at HMRC.”

However, HMRC is eager to prevent taxpayer money from going to waste. An HMRC-issued report found 16.7% of all R&D tax claims were wrong or fraudulent.

Nigel May, tax partner at accounting firm Gravita, said: “HMRC is in an extremely difficult position as it attempts to combat fraud in the R&D tax credits system. While the new requirements will make it more difficult to game the system, they also add yet another layer of bureaucracy for business owners.”

Rutland added: “Businesses involved in R&D will need to ensure they are clearly demonstrating their qualifying activities to HMRC. Failure to do so may mean they run the risk of an HMRC enquiry.”

Changes to R&D tax credits were announced in the Autumn Statement but faced criticism from UK startups, which reduced the amount they could claim in tax relief.

However, the government watered down these changes in the Spring Statement.

The government recently introduced draft legislation to combine R&D expenditure credit and SME R&D relief.