HMRC ‘nudges’ 2,000 companies to clamp down on R&D tax fraud and error

HMRC has written to more than 2,000 companies as part of its ever-increasing compliance activity to crack down on fraudulent and inaccurate R&D tax relief claims.

The ‘nudge’ letters encourage recipients to check that their previous R&D tax relief claims are complete and correct, and where inaccuracies are identified, companies are urged to make amendments to their company tax return.

HMRC has also warned companies that they may face formal tax enquiries and rejected claims if their returns are found to be incorrect.

There has been growing concern about a rise in R&D tax relief fraud in recent years.

In January this year, the Lords Finance Bill sub-committee published a report which highlighted an escalation in the abuse of R&D tax relief, noting that the relief was subject to large-scale organised criminal attacks and the activities of rogue advisers.

In its latest annual report and accounts, HMRC estimated that £469m was lost through fraud and error in its two R&D schemes in 2021-22, equivalent to 4.9% of Corporate Tax R&D reliefs.

To address these concerns, the government has increased compliance resource and activity, and the specialist R&D team focused on SME compliance has more than doubled in size.

Commenting on the nudge campaign, Carrie Rutland, innovation incentives partner at BDO said: “Companies that have been nudged by HMRC may face higher tax penalties if their claims contain errors. Getting an expert review of past claims by a specialist is the best way to identify and rectify any mistakes in past years’ tax relief claims – both for returns that are in date to amend and for any previous years where voluntary disclosures are required.

“However, it’s important for all businesses to review their past R&D claims to make sure there are no potential skeletons in the company closet. It’s always better to make a voluntary disclosure for errors before you are nudged by HMRC, as this should be treated as an ‘unprompted’ disclosure which carries a much lower penalty – if any. I would expect HMRC to keep on issuing these nudge letters, so the window of opportunity to get past claims put right at a lower cost could be closing soon.

“Past R&D claims often come up whenever a potential purchaser is doing due diligence, so management considering a sale will want to make sure there are no barriers to getting a successful transaction over the line.”

The government is currently consulting on reforms to R&D tax relief regime to ensure taxpayers’ money is spent as effectively as possible through a simplified, single relief.