- Error and fraud within R&D tax relief reached £1.1bn in 2020-21 (24% of all claims) before HMRC took action to stem the losses and tighten up the claims processes.
- New disclosure facility launched for businesses who overclaimed R&D relief wanting to set their compliance record straight.
- The terms for those using the new facility aren’t favourable, so take up expected to be limited unless its followed by a ‘nudge’ letter campaign to companies having made suspect claims.
- Timing of its launch on New Year’s Eve seems unusual, immediately ahead of the January busy period for tax professionals and businesses with 31 December year ends.
TaxWatch has been writing about compliance issues within the Research & Development (R&D) tax relief regime for years and have welcomed recent attempts by HMRC to limit the scope for abuse of the relief especially by agents misleading the unwary to claim for relief that is not available. Changes made in 2023 have fed through into lower levels of fraud going forward.
Now HMRC are focussing on historic claims for relief, trying to uncover and claw back claims that are either wholly unsubstantiated, or where the amount of relief actually available was lower than the relief claimed. Bulk compliance enquiry teams have been recruited into HMRC, and this has now been supplemented by a new dedicated disclosure facility for taxpayers to come forward voluntarily to amend their claims and repay the amounts due.
Questionable timing and structure
However, the timing and structure of the disclosure facility opening seem unusual. Picking New Year’s Eve as the launch day is probably the worst point in the calendar if you want taxpayers and their agents to notice it and ponder its relevance to their business. Most companies operate to a financial year end of 31 December or 31 March so finance and tax teams are busiest now. Plus, with other deadlines including income tax self-assessment being at the end of January, many tax advisers are busy handling other client work. The decision to announce it quietly during such a hectic season undermines HMRC’s efforts to ensure its visibility.
For businesses who are eligible to use the facility (it can’t be used where there is deliberate misconduct; nor to adjust claims within the time period for normal amendment) uptake might be lower than HMRC expect, as the appeal of the facility is debatable. Unlike previous disclosure facilities, there are few benefits to using the facility. For example,
- HMRC can reject submitted calculations of additional tax due, and may open enquiries regardless of disclosures being made, which can lead to additional penalties.
- The facility doesn’t shield taxpayers from prosecution for criminal tax evasion where HMRC judge that the conduct of the taxpayer merits charges, in contrast to the Contractual Disclosure Facility (CDF) or, for offshore matters, the Worldwide Disclosure Facility (WDF).
- The tax due on corrected liabilities is payable within the standard period of 12 months, unless a ‘Time to Pay’ arrangements is agreed with HMRC.
The lack of tangible incentives to come forward may deter many businesses from making a voluntary disclosure. Many companies, particularly in sectors actively targeted by disreputable claim firms, including social care and construction, have long since spent the tax refund resulting from their claim. For them, whilst getting their affairs in order would bring peace of mind and guard against higher penalties if HMRC discover the overclaim later, repaying substantial amounts could trigger severe cash flow crises, tempting many to lay low and take their chances.
A prelude to a broader compliance campaign?
HMRC’s increasing reliance on ‘nudge’ letters—a tactic highlighted in TaxWatch’s SOTA report —suggests this facility may be the first step in a larger compliance campaign. Nudge letters, sent to groups of taxpayers based on HMRC intelligence, encourage recipients to review and correct their claims before facing more rigorous enforcement measures begin.
Given the Autumn Budget’s focus on closing the tax gap by 2025, it is plausible that HMRC will intensify its scrutiny of previous R&D relief claims. The disclosure facility could serve as a precursor to a broader effort to recover these historic losses.
