When you go, will you send back a letter from the Treasury?

Here at WhisperClaims we’ve been poring over a fascinating document published recently as part of the House of Lords investigation into R&D—it’s a letter from the treasury to the Finance sub-committee, and contains all sorts of interesting stats and figures that HMRC don’t usually publish! It covers everything from the level of fraud and error, through HMRC’s current enquiries strategy, all the way to HMRC’s plans for the future management of R&D claims. Here’s our round-up of the highlights and what you need to know.

Error and Fraud

The letter reiterates HMRC’s stats around fraud, stating that they believe 7.3% of SME expenditure and 1.1% of RDEC expenditure is claimed in error or fraudulently. Although the changes to the ONS stats that were highlighted recently suggested that the level of fraud and error might be lower than this, the letter dismisses this, whilst stating that HMRC are looking at better ways to calculate fraud and error in the scheme themselves. 

Compliance 

For the first time that we know of, the letter details the size and make-up of HMRC’s compliance team looking at R&D tax relief—there are 245 members of staff in the Incentives and Reliefs team. This team includes staff from all levels and is tasked with looking at compliance across all incentives and reliefs, not just R&D tax reliefs. They do say, however, that the R&D team within this larger team has doubled in recent years.

The most breathtaking statistic in the whole letter is that 84% of enquiries closed in 2022/23 so far were deemed to be inaccurate, and that the additional amount due to HMRC was, on average, £128,000 per claim. Given that these claims were looked at because HMCR suspected that they contained errors, you’d expect a high rate of error, but I don’t think anyone would expect it to be that high!

Another surprising statistic is that 80% of the 1,685 recipients of FIS letters over the summer failed to respond within 30 days. HMRC feels that this shows that the letters were appropriately targeted at companies who should not have been claiming and therefore could not defend their claims. 

Enquiries

Of particular interest is the data around the current uptick in enquiries—the letter details how HMRC launched a ‘one-to-many’ compliance activity in October, targeted at sectors where HMRC wouldn’t expect to find eligible R&D. In October they sent 1,000 letters to first-time claimants, and this month will send 1,000 more letters to ‘industries that are unlikely to have undertaken activities that would qualify for the relief’. 

Alongside this, they’ve also implemented a ‘mandatory random enquiry programme’ to sample claims and collect data about the level of error and fraud in the scheme. This does suggest that the enquiry rate is likely to remain at its current level for the foreseeable future. On the back of this, it would certainly seem sensible to warn any first-time claimants, or indeed any claimants in less eligible sectors, to the fact that enquiries may be more likely. It’s certainly not a reason not to claim, but is perhaps something to head off early and warn clients that random checks are in place. 

Upcoming changes

Part of the letter seeks to explain the upcoming changes to the R&D tax relief schemes, and how these will increase compliance. Most interesting here is the explanation of the intentions behind pre-notification of claims—HMRC see this as a way to both prevent the submission of “spurious claims…for earlier years where a company has correctly not previously claimed the relief”, and to give them a chance to reach out and educate those who intend to claim before the claim is submitted. In many ways, this feels like a second attempt at advance assurance—talking to new claimants before they submit a claim to ensure they are doing eligible work. 

Finally, there was some indication of what HMRC is planning to implement to enable pre-notification and digital submission of claims. They describe a new service being developed involving a simple form for digital submission, and requiring a company to describe upfront what scientific or technological advancements they are seeking. None of this was very specific, but we’re poised here at WhisperClaims to make whatever changes turn out to be necessary to make it easy for our users to comply with whatever HMRC’s requirements turn out to be.