A government scheme to promote new research and boost the economy has cost more than £4bn in fraud and error since 2020 after widespread abuse.
The research and development tax credit scheme was designed to help drive world-leading innovation but has turned into what experts have described as a “wild west” with large volumes of dubious claims.
Claims of groundbreaking research included a safer method developed by a window cleaning firm to keep a bucket of water afloat; adding vegan and gluten-free options to a bar menu; and redesigning corporate websites. The scheme was described by some agents as “free money”.
New figures published in HM Revenue and Customs’ annual report last week show that the estimated cost of fraud and error in the scheme was more than £4.1bn from 2020-21 to 2023-24. HMRC says spending on the reliefs in 2023-24 was £7.7bn.
The scale of the misuse of tax credits emerged as Rachel Reeves, the chancellor, pledged to crack down on tax fraud and non-compliance. Labor hopes to raise £5 billion by the end of this parliament by recovering more tax revenue. Tax officials said the error and fraud in R&D tax relief revealed in the report was “clearly unacceptable” and the public would expect action.
Colin Hailey, a technology tax expert who has given evidence to parliament about the tax breaks, said he and other advisers had warned about the abuses in the scheme more than six years ago. He said claims were not properly investigated by HMRC and the increase was driven by agents demanding hefty commissions.
“There has been an industrialization of the claims process with all these advisers saying they are experts and can sort the claims for between 20% and 30% of the value,” Hailey said. “It was the wild west. These advisors were cold-calling firms and saying, ‘you don’t think you do R&D, but we can help you’.
“I remember speaking to tax inspectors in Manchester and saying: ‘We had a claim from a window cleaning company who demanded for the R&D to hang a bucket on the other side of the ladder.’ It was quite rightly dismissed, but they knew these claims were out there.”
Companies complained of being inundated with calls from agents urging them to sign up for the tax credits. Operators of care homes, bars, fitness centers and dental clinics have been told to apply for the tax credits, based on their best ideas to improve business. One tax consultant claimed on his website to have saved a hotel and pub in Chester £28,000 with a claim for “innovative menus, catering for vegan and gluten-free diets”. The firm and the bar considered that the claim was allowable, because of “all the hard work involved in putting together our menus”.
HMRC did not respond to a request for comment on whether the tax relief allegedly claimed by the hotel and pub business was legitimate.
A House of Lords finance bill subcommittee hearing was told in November 2022 that some advisers claim “about 99% of our claims are accepted by HMRC. It’s free money.” Agents were alleged to have encouraged companies to claim for activities that would not normally be classed as research, such as redesigning a website.
The tax relief was first introduced in 2000 in response to evidence that Britain’s R&D spending was lagging behind that of its competitors. The scheme works by reducing a firm’s corporation tax bill or by making a direct payment to the business. A valid claim must represent a significant advance that overcomes scientific or technological uncertainty and that “could not be easily worked out by a professional in the field”.
The HMRC annual accounts published last week show that the projected and final estimates of the value of errors and fraud in the scheme were £1.127bn in 2020-21; £1.337bn in 2021-22; £1.051bn in 2022-23; and £601m in 2023-24.
to newsletter promotion
According to the report, one analysis of claims for small and medium-sized businesses in 2021-22 estimated that about one in four contained errors or fraud, which was described as “among the highest reported across all government spending programs, including those in response to the pandemic“.
Officials are now checking claims more tightly as they hope to recoup some of the billions of pounds lost through errors or fraud. They will also increase the number of compliance inquiries.
An HMRC spokesman said: “Last year we generated a record £843.4 billion in tax revenue, up 3.6% on the previous 12 months.
“With R&D claims, public money is at stake and taxpayers rightly expect us to scrutinize them. We do this thoroughly and fairly, and the vast majority of valid claims are paid on time.
“But the levels of non-compliance we see within these schemes are clearly unacceptable and the public rightly expect us to act. This includes better help, guidance and processes, as well as decisive action against the minority who want to deliberately abuse the schemes.”
