Tax authority ‘abusing its power’ by cancelling R&D credit claims

The taxman blocked companies’ access to tax reliefs for innovation using a method that has been criticised as an “abuse of power”.
A division of HM Revenue & Customs that pursues tax fraud “corrected” 2,100 claims for research and development tax relief in 2022 and 2023 by removing claims from tax returns without opening an inquiry.
The Chartered Institute of Taxation has called this approach “very concerning”. It said companies should be given the “ability to respond and explain” where the tax authority suspected a claim may not qualify.
Research and development tax credits provide multibillion-pound incentives for companies to invest in innovation. HMRC has been moving to tackle widespread fraud and error in the schemes. The tax authority claims that the generous nature of the relief and the fact that it generates repayments have made it an “attractive target for organised criminal gangs and wider non-compliance”.
An investigation by The Times in 2022 revealed how the scheme had been targeted by fraudsters and by advisers encouraging companies to make dubious claims. HMRC has estimated that error and fraud on a version of the tax relief for smaller companies comprised 24.4 per cent of relevant expenditure in 2020-21, or more than £1 billion.
However, there have been widespread concerns that increased compliance work risks punishing genuine claimants and even could drive investment overseas.
A response to a freedom of information request shows that 1,430 claims for the relief were “corrected” in 2022 as a result of the work of an R&D anti-abuse unit based in HMRC’s Fraud Investigation Service, with another 670 “corrected” in 2023.
Price Bailey, the accountancy firm that submitted the FoI request, said it was concerned that HMRC may be “misusing powers” it enjoys under the Finance Act. It said that the Fraud Investigation Service had issued 2,860 letters to research and development claimants across 2022 and 2023 and that 73 per cent of claims were amended by inspectors.
“HMRC is only supposed to use its powers to amend tax returns in very specific and limited circumstances,” Gemma Thake, tax partner at Price Bailey, said. “What they cannot do is make a blanket determination about a claim based on the sector of the claimant, for example, which seems to be what has happened in many cases.
“While there is common acceptance that fraudulent claims should be challenged, HMRC’s sweeping approach may not result in the right outcome in all cases.”
The tax authority said the accusations that it had misused its powers were “simply untrue. We use our powers correctly and strictly within the law, which means we have the right to correct errors or omissions when they are identified within claims.”
In a letter to the tax authority in December, the Chartered Institute of Taxation said the use of powers that were there to correct “obvious errors” to remove R&D tax claims amounted to “an abuse of power because it circumvents the inquiry process”. It “does not seem right to us that HMRC can circumvent the need for an inquiry by simply denying the claim for R&D tax relief outright”, the institute wrote.
HMRC said: “While it’s important that R&D tax reliefs are easy to claim and are provided quickly to genuine claimants, we need to balance this against the unacceptable levels of non-compliance that have been identified, for which the public rightly expect us to take action.” It said taxpayers could still challenge its decisions and that better guidance was in place for legitimate claimants.Rufus Meakin, who writes the R&D Tax Credit Insider blog, said: “This looks like a prime example of overreach by HMRC in its belated attempt to get a grip on fraud and error. Unfortunately, this may also have frightened off eligible companies from making R&D tax credit claims to which they are fully entitled.”