According to the latest HMRC accounts, £4.1 billion has been lost due to errors and fraud in tax schemes intended to stimulate business research and development, which were introduced in 2020. This revelation has sparked a dispute between the current and former governments over a gap in the country’s finances.
The Corporation Tax Research and Development tax relief scheme, aimed at small and medium-sized businesses, and the Research and Development Expenditure Credit for larger businesses, were established to incentivise innovation in fields like technology and pharmaceuticals.
These schemes, which have now merged, allowed companies to reduce their corporation tax by offsetting research and development expenditures.
An “enhanced” version of the scheme was introduced in April 2023 to benefit small businesses operating at a loss by enabling them to pay even less tax.
Critics argue that some businesses are exploiting these schemes fraudulently. HMRC reports that in 2020-21 and 2021-22, over one-sixth of the scheme’s funds were lost to error and fraud, a figure higher than initially estimated. However, this rate decreased to 13.3% in 2022-23 and further to 7.8% in 2023-24. HMRC noted that errors were more prevalent than fraud.
In 2022, tax expert Colin Hailey told a House of Lords committee: “Outside advisers cold-call companies all the time saying, ‘We have a special relationship with HMRC. Some 99% of our claims are accepted by HMRC. It’s free money from HMRC.'” He also claimed that a “wild west” of tax advisors were making money by pushing companies to claim the tax relief offered by the scheme.
The Conservatives say that they have been transparent about the financial situation, but Labour insists that there is now a £22 billion shortfall due to undisclosed expenses which now need to be addressed through spending cuts and tax hikes.
Among the cuts, the chancellor announced last week that the government would stop offering winter fuel allowance for pensioners who aren’t on benefits. Labour also plans to introduce public sector pay rises and a national wealth fund called “GB Energy”.
