Forthcoming R&D tax relief reforms ‘won’t be enough to prevent spurious claims’

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On the backdrop of an estimated £469 million worth of Research & Development (R&D)-related error and fraud having happened during the 2021/22 financial year, a Parliamentary inquiry has found that reforms to R&D tax relief set to be put in place by the UK Government probably won’t be sufficient to prevent bogus claims.

The report that reached this conclusion was published by a House of Lords economic affairs committee. It provided a critical assessment of new compliance changes for R&D tax relief, suggesting that they lacked focus and would not be effective “in isolation”.

Lord Leigh of Hurley, chair of the Economic Affairs Finance Bill Sub-Committee, said to Accountancy Age: “Reforming the tax relief in itself isn’t enough. HMRC has come up with some ideas for compliance, which are put back onto the taxpayer, but what we’d like to see is HMRC putting more resources into ensuring that compliance works.”

What else has the subcommittee’s report said about the R&D tax relief changes?

The subcommittee’s report comprises views gathered from an industry consultation phase and scrutinises the UK Government’s proposed R&D reforms, as outlined in its latest draft Finance Bill.

The subject of R&D-related error and fraud is an especially urgent and relevant one at the moment, given that the aforementioned estimate of £469 million for the 2021/22 financial year represents a 40% year-on-year rise.

By way of reform, the Government has proposed a requirement to provide more information in relation to R&D tax relief claims. It will also be necessary to name any tax adviser involved and to have a senior officer of the company endorse the claim.

However, the subcommittee’s report urged the Government to take “a more focused and targeted approach to identifying suspect claims”. It reserved specific criticism for the current regime’s “process now, check later” approach, arguing that the improvement of guidance and communications to businesses could allow them to mitigate any errors prior to a claim being made.

In Hurley’s words: “The way the system works at the moment is HMRC first pays out and then investigates afterwards. And, of course, when HMRC attempts to recoup the money, the taxpayer may be there, but the agent has disappeared.

“We think HMRC should clarify that this is a payment which is subject to subsequent review.”

Nor did the report take a favourable view of the Government’s plan to refocus relief activity to expenditure in the UK instead of offshore. As an alternative, the subcommittee said there should be a form of “transitional relief expenditure” for specialised resources that cannot presently be found in the UK.

The report concluded that it was important for the Government to look beyond the draft Bill and consult on ways to improve the scheme.

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