SMEs Caught in HMRC’s R&D Tax Relief Crackdown

The HMRC are investigating thousands of Research and Development (R&D) Claims, amid a push to combat fraudulent claims.

Back in 2000 the government launched the R&D tax relief scheme, encouraging innovation and competition from UK companies. Under the scheme there are 2 main components:

• Small and Medium-sized Enterprises (SMEs): Aimed at smaller companies with fewer than 500 employees and either an annual turnover under €100 million or a balance sheet total under €86 million. SMEs can claim a higher rate of tax relief compared to larger companies.
• Research and Development Expenditure Credit (RDEC): Aimed at larger companies that do not meet the criteria for SME R&D relief. RDEC allows these companies to claim a taxable credit worth up to 13% of their qualifying R&D expenditure.

Initially, no checks on those applying for the relief, and no evidence or documentation of R&D, were required, leaving the scheme wide open to exploitation and fraudulent claims. Complex rules and ‘grey areas’ have also resulted in many incorrect claims. So far, the HMRC estimates there to be up to £1.13billion worth of incorrect and fraudulent claims between 2020-2021. 

In response to this, HMRC has employed an additional 300 people to work on compliance over the last 3 years. In 2022, they created an R&D Anti-Abuse Unit to handle and investigate claims. Since August 2023, all claims have to be made digitally and be accompanied by additional documentation. 

However, SMEs that have complied with the rules, are finding themselves facing the same treatment as those who have exploited loopholes or submitted fraudulent claims. The Federation of Small Businesses (FSB) has noted a surge in complaints from businesses being faced with penalties, despite filing accurate claims. Furthermore, in the midst of HMRC’s crackdown, those eligible for R&D relief have had their claims denied with no clear reason. Responses like this may make companies reluctant to make genuine claims for fear of repercussions.

Industry bodies, such as the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Taxation (CIOT), have called for improvements to the system, urging HMRC to strike a balance between tackling abuse and safeguarding legitimate claims. 

Despite this, the R&D scheme is still an effective aid to businesses who are genuinely carrying out research and development, so don’t be put off from making a claim. However, make sure you use an experienced advisor, who knows the intricacies of the scheme.

Get in touch with us today and we can guide you through the process.

You can reach us by phone or email at 0330 088 1701 or hello@dhbusinesssupport.com. Our friendly and professional team is looking forward to helping you.