Fraud And Errors In UK R&D Tax Schemes Lead To Billions Lost

The UK government has lost £4.1 billion in taxpayer funds because of errors and fraud in R&D tax schemes since their introduction in 2020, according to the HMRC. Critics argue that some companies are exploiting these tax breaks without conducting genuine R&D activities which led to a scandal that has left the public outraged.

These relief schemes were initially created as a way to encourage innovation in the tech industry, among others, so that companies can reduce their corporation tax in taking away some R&D expenses.
 

What Did This Mean For Fraud Rates?

 
The HMRC acknowledged that this level of non-compliance is unacceptable, and promises to do something about those who go out their way to abuse these tax schemes. An HMRC spokesperson told BBC, “The public rightly expects us to take action, and we are increasing our efforts to combat fraud and error in the R&D tax schemes.”

The government have also issued an action plan on how non-compliance is to be dealt with for R&D tax relief schemes. They’ve introduced policy changes to control R&D schemes better, such as expanding the workforce dedicated to compliance as a way to help the operations improve. They’ve also created an Anti-Abuse Unit to handle claims better.

Random audits from SMEs have also been put in place so they can be informed and on the same page when it comes to remaining compliant, even as a startup, for example. These are just a few of the measures they’ve announced, and with the clear improvements in the past year, compared to the one before, the UK has clearly taken this seriously. Over time, the amount of error and fraud has fallen, with the percentage dropping from over 16% in 2020-21 to 7.8% in 2023-24.
 

Political Dispute Over Public Finances

 
The issue of R&D tax scheme fraud has become a constant topic between the current UK government and previous government. Labour argues that necessary cuts and tax hikes result from undisclosed spending by the former administration, while the Conservatives claim they were transparent about public finances. This has added fuel to an already fiery debate over public finances, and the direction of government spending.

Chancellor Rachel Reeves has blamed the previous Conservative government for financial losses, leading her to cut the winter fuel allowance for those not on benefits and announce billions in other cuts. Jeremy Hunt, the previous chancellor, has criticised Labour’s spending announcements since winning power and says they are making choices that exacerbate the financial issues. The Institute for Fiscal Studies has weighed in, and acknowledges that some of Labour’s claims of hidden spending appear to be correct but, that half of the spending hole is related to known pressures.
 

Fraud Prevention And Defence Measures

 
Another way to address the issue of fraud, with companies like Basware are recommending advanced solutions to remain protected against potential threats.  Jason Kurtz, CEO of Basware, explained, “Fraud is an issue keeping finance departments up at night, and all organisations, including HMRC, face regular fraud threats. Fraudsters, often as well-funded as big businesses, are escalating the sophistication and frequency of their attacks, necessitating increased investment in defence measures.”

Kurtz said, “Prevention is always better than cure. Organisations should deploy AI-powered fraud prevention systems, trained on known indicators of mischaracterised payments and vendor impersonation scams, to detect anomalies and enable proactive intervention.”

This call to action resonates with many who believe that traditional methods of fraud prevention are no longer adequate in the face of modern threats.