By C. Perera, JadeTimes News
Billions of pounds of taxpayer money have been lost due to errors and fraud in tax schemes intended to promote research and development in businesses. Critics argue that some companies are claiming these tax breaks without engaging in any actual research or development.
According to HMRC's latest accounts, £4.1 billion has been squandered since the introduction of these schemes in 2020. HMRC has labeled the levels of error and fraud as "unacceptable." This revelation comes amidst a dispute between the current and former governments over a "hole" in public finances.
Labour contends that cuts and tax increases are necessary due to undisclosed spending by the previous administration, while the Conservatives maintain they were transparent about the state of public finances.
The Corporation Tax Research and Development tax relief scheme for small to medium-sized businesses, and the Research and Development Expenditure Credit for larger businesses, were designed to reward companies investing in innovation, such as tech or pharmaceutical firms. These schemes, now merged into one, allowed companies to offset their research and development expenditures against their corporation tax liabilities, thereby reducing their overall tax bill. In April 2023, an enhanced scheme was introduced for small businesses making a loss, allowing them to pay even less tax.
However, critics claim that some businesses are fraudulently exploiting these schemes. Tax expert Colin Haley informed a House of Lords committee in November 2022 that dishonest business owners were taking advantage because claims were automatically approved by computers. He described a "Wild West" of tax advisors profiting by encouraging companies to claim the relief.
An HMRC spokesperson stated that the "levels of non compliance. are clearly unacceptable," and that the public expects action. The number of civil servants working on compliance for these schemes has increased from 100 to 500 over the past four years. Consequently, the rate of error and fraud has decreased. In 2020.21 and 2021 to 22, over a sixth of the money spent on the schemes was lost to error and fraud, but this fell to 13.3% in 2022to23 and to 7.8% in 2023 to 24. HMRC indicated that errors were more common than fraud.
"Error and fraud" encompasses a range of behaviors, from mistakes and lack of reasonable care to deliberate non compliance, according to HMRC.
Some argue that HMRC has been overly aggressive in regulating the tax relief schemes. In March, several businesses reported being asked to repay money they had legitimately claimed. Speaking to the Lords committee in 2022, Mr. Haley supported tax relief for research and development but advocated for greater scrutiny of claimants.
The publication of HMRC's figures coincides with Labour and the Conservatives debating a £22 billion "hole" in public finances. Chancellor Rachel Reeves recently attributed her decision to cut the winter fuel allowance for those not on benefits to previously undisclosed spending by the Conservatives and promised additional cuts. Former Chancellor Jeremy Hunt has criticized Labour's spending decisions since taking office, highlighting plans for a national wealth fund, GB Energy, and public sector pay rises. The Institute for Fiscal Studies has stated that some of Labour's claims about hidden spending appear to be correct, though it noted that public sector pay pressures were known and represent a choice by the government.
