A government scheme designed to boost innovation and boost the economy has lost more than £4 billion to fraud and error since 2020, due to widespread breaches.
The R&D tax credit scheme, which aims to drive world-leading innovation, has been dogged by dubious claims and has turned into what experts have called the “Wild West.” The allegations have included a window cleaning company’s “innovative” way of carrying a bucket of water up a height, a pub adding vegan and gluten-free options to its menu, and companies redesigning their websites.
According to HMRC’s annual report, the estimated cost of fraud and error in the scheme was more than £4.1 billion from 2020-21 to 2023-24. HMRC reported that exemption expenditure in 2023-24 was £7.7 billion.
The revelations come as Chancellor Rachel Reeves has vowed to crack down on tax fraud and non-compliance, with Labour aiming to recover £5bn in tax revenue by the end of the current parliament. Tax officials have described fraud and errors in R&D tax credits as “clearly unacceptable” and promised public action.
Colin Healey, a technology tax expert, testified before parliament about the abuses in the system more than six years ago. He criticised the lack of proper scrutiny by HMRC and pointed to the role of agents demanding huge rewards for making these dubious claims. “It was like the Wild West,” Healey said. “These consultants would call up untrustworthy companies and say, ‘You don’t think you’re doing R&D, but we can help you.’”
Businesses across a range of sectors, including care homes, pubs, gyms and dental practices, have been contacted by agents urging them to apply for the tax breaks. One tax consultancy claimed it saved a Chester hotel and pub £28,000 by “creative menus that cater for vegan and gluten-free diets”.
HMRC has not confirmed whether these claims are legitimate. However, a House of Lords Finance Bill subcommittee heard in November 2022 that some advisers boasted of a 99% acceptance rate for claims by HMRC, referring to the scheme as “free money”.
Introduced in 2000 to address the decline in R&D spending in the UK, it reduces a company’s corporation tax bill or provides a direct payment if the application represents a significant advance in overcoming scientific or technological uncertainty.
HMRC’s annual accounts reveal that errors and fraud in the scheme cost £1.127bn in 2020-21, £1.337bn in 2021-22, £1.051bn in 2022-23 and £601m in 2023-24. An analysis of claims made to small and medium-sized businesses in 2021-22 estimated that around one in four contained errors or fraud, giving it one of the highest non-compliance rates of any government spending scheme.
In response, HMRC is now rigorously examining claims and increasing compliance inquiries to recover some of the billions lost.
A HMRC spokesperson said: “We achieved a record £843.4 billion in tax revenue last year, up 3.6% on the previous 12 months. With R&D claims, public money is at stake and taxpayers rightly expect us to scrutinise them. We do this thoroughly and fairly, and the vast majority of valid claims are paid on time. But the levels of non-compliance within these schemes are clearly unacceptable, and the public rightly expect us to take action. This includes help, guidance and better processes, as well as decisive action against the minority who have deliberately set out to abuse the schemes.”