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Uncovering Tax Relief Claims: An Analysis of Non-compliance within the UK R&D Tax Relief System

Mid Market Firm

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In a recent analysis of the SME Research and Development Tax Relief program (MREP), some eye-opening trends have emerged, shedding further light on the considerable level of non-compliance within the R&D tax relief system. This article summarizes a breakdown of the key findings.

Claimant Behavior

A shocking 50% of all R&D tax relief claims submitted showed some degree of non-compliance, but it’s crucial to differentiate between innocent errors and deliberate fraud. Fraud indicators were detected in less than 10% of examined claims, accounting for less than 5% of the total claimed amount. To classify a claim as fraud, there must be evidence that the claimant sought to deliberately misrepresent their circumstances.

The majority of non-compliance arises from various behaviors, ranging from honest mistakes to unintentional lapses in judgment. It’s important to understand that the term ‘non-compliance’ encompasses this wide spectrum.

Analysis revealed that 25% of claims were fully disallowed due to a lack of qualifying R&D activity, without any indications of fraud. In a further 19% of cases, businesses had overstated their qualifying expenditure or included incorrect expenditure when calculating the relief, but there was no fraudulent intent. Only 2% of cases involved a genuine claim attempt, but with a technical misinterpretation of R&D legislation.

Assessment by Size of Expenditure

The size of expenditure examined had a significant impact on compliance. Here’s a breakdown by expenditure size:

  • Nearly 75% of claims under £10,000 were non-compliant.
  • Approximately 75% of claims over £1 million were fully compliant.
  • In between these extremes, compliance rates ranged from 35% to 64%.

Additionally, as expenditure size decreases, the proportion of non-compliance relative to the claim value increases. For claims under £30,000, around 64% were deemed either entirely or partially non-compliant. Given that fraud rates are comparatively low, it shows a huge gap in claimant and agent understanding of the scheme and its application within the business environment.

Assessment by Industry

There was a similar disparity in claim accuracy when comparing the compliance of R&D claims via industry type with some notable figures highlighted below:

  • Only 11% of claims within the ‘Education’ sector were deemed as wholly compliant.
  • Compliance was below 50% within the ‘professional, scientific and technical activities’ sector, any area where you would have expected claimant and agent knowledge to be greatest.
  • ‘Public administration and defence’ and ‘Manufacturing’ were the 2 best performing sectors with compliance rates of 75% and 69% respectively.

In summary, this analysis underscores the importance of having a robust understanding of the R&D tax relief system, and is application to qualifying project work and expenditure when assessing tax relief claims. While fraud remains a concern, the majority of non-compliance arises from other factors with smaller claims more likely to be non-compliant. Businesses should exercise due diligence and seek expert guidance to navigate the complexities of the R&D tax relief system and to ensure they process their claims effectively. Running in tandem with this, agents must improve their knowledge of how to apply this legislation in a compliant manner. With these figures in mind, it may be that a simplification of the R&D tax relief system is needed, with HMRC more clearly defining the parameters of the scheme and what constitutes qualifying activities and expenditure within it.

Full details of the analysis can be found here.

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