Corporate report

Approach to Research and Development tax reliefs 2023 to 2024

Published 30 October 2024

Introduction

R&D tax reliefs are generous incentives that support companies to invest in innovative projects in science and technology. UK R&D tax reliefs aim to unlock additional private sector investment to drive economic growth across the UK.

Government must ensure R&D tax reliefs continue to be well targeted and provide value for money. Therefore, HMRC must tackle non-compliance while enabling legitimate claimants to continue benefitting.

However, concern over non-compliance in R&D tax reliefs has grown in recent years and HMRC needs to ensure that companies who are eligible for these reliefs are able to access them while protecting taxpayers’ money from abuse.

This document sets out further data relating to the error and fraud position up to 2023 to 2024 and new data published for the first time on customer experience. It also sets out policy and operational changes that have been made to 2023 to 2024 to address the high levels of error and fraud.

HMRC uses the terms ‘non-compliance’ or ‘error and fraud’ to encapsulate a range of behaviours, from mistakes and failure to take reasonable care through to deliberate non-compliance. For example, in the R&D reliefs, one example of a common error is companies claiming for expenditure that has not been incurred as part of qualifying R&D activity.

1. Setting the context

In July 2023, HMRC published its Approach to Research and Development tax reliefs (referred to below as the ‘July 2023 report’) alongside its 2022 to 2023 Annual Report and Accounts (ARA), setting out its analysis of the scale and shape of non-compliance in R&D tax relief claims for 2020 to 2021. At the time, HMRC also committed to sharing a further update as part of the response to the Public Accounts Committee (PAC) on this issue.

This document provides an update on the actions set out in the July 2023 report and additional changes made since then. As it takes time for claims to be submitted and be processed, there are usually delays between making a change to the relief and being able to measure its impacts. The most recent analysis relates to claims made by SMEs in 2021 to 2022 and so does not show the effects of many of the recent changes made to drive down non-compliance.

1.1. Number of claims

The latest data on number of R&D claims was published in HMRC’s annual R&D statistics in September. Following the policy and administrative changes introduced to reduce error and fraud (set out in section 2), there was a reduction in claim numbers. Overall, claims for R&D reliefs fell from 83,240, in relation to 2021 to 2022 to 65,690 in relation to 2022 to 2023. There was a particular reduction in Small and Medium-sized Enterprise (SME) claims, which fell from 71,905 in relation to 2021 to 2022, to 55,325 in relation 2022 to 2023, a drop of around 23%.

The cost of the R&D reliefs has risen significantly in recent years. In 2014 to 2015, claims totalled £3 billion, and by 2022 to 2023 this had risen to £7.5 billion.

1.2. Current error and fraud estimates

Measuring accurately the non-compliance associated with a tax relief such as R&D tax credits takes time and involves a considerable investment of resources. There are inevitably long lags in data being available, as it takes time for claims to be submitted and processed, including for compliance checks to be completed.

Prior to the introduction of the Mandatory Random Enquiry Programme (MREP), HMRC’s understanding of the level and nature of non-compliance in R&D tax credits was incomplete. In light of concerns about the scope of non-compliance HMRC therefore introduced MREPs for claims made by small and medium enterprises to provide a more accurate picture. The MREP approach represents good practice in the measurement of error and fraud, and involves a detailed inspection of a representative sample of claims filed. The first of these MREPs, giving a more comprehensive understanding of non-compliance for 2020 to 2021, was published in July 2023 alongside HMRC’s ARA. A second MREP, covering 2021 to 2022, was published in July 2024 and a third MREP is already underway.

HMRC’s latest error and fraud estimates, published in its 2023 to 2024 ARA, show that in 2021 to 2022, of £7.6 billion claimed, the overall level of error and fraud was £1.3 billion (17.6%). Of this, £1.2 billion was in the SME scheme (25.8% of the expenditure in that scheme) and £134 million in the R&D expenditure credit (RDEC) scheme (4.6% of expenditure in that scheme).

Evidence from HMRC’s second Mandatory Random Enquiry Programme (MREP2) shows that in 2021 to 2022 around half of claims from SMEs were non-compliant in part or in full, and 30% of claims were non-compliant in full. The MREP analysis in annex B also includes analysis by value of claim and sector.

HMRC analysis of recent claim changes (as outlined in section 1.1) has shown that the largest reduction in the value of claims was where expenditure was below £20,000. Analysis of Standard Industrial Classification (SIC) sectors also showed that the greatest reduction in the total value of claims was in the arts, entertainment and recreation sector, as well as the hospitality sector, which includes accommodation and food services (hotels, restaurants, bars). These are sectors that HMRC typically would not expect to see large volumes or values of R&D claims.

HMRC has completed further analysis to produce an illustrative estimate of error and fraud for 2023 to 2024, which was set out in the 2023 to 2024 ARA. This analysis looked at the reduction in claims set out above and the characteristics of these claims. It also reflects the policy and operational measures implemented to address error and fraud (where this is possible because of a more robust evidence base for some of these measures such as increased compliance staffing).

This has resulted in an error and fraud estimate of 7.8% for R&D reliefs overall, and 14.6% for SMEs for 2023 to 2024. These illustrative estimates indicate that changes made to the reliefs have reduced error and fraud in 2023 to 2024 to 7.8% (£0.6 billion).

Table 1: Estimated error and fraud in R&D tax credits, reported since MREP was introduced

Category	2020-21	2021-22	2022-23 (note)	2023-24 (note)
Overall	16.7%	17.6%	13.3%	7.8%
SMEs	24.4%	25.8%	19.5%	14.6%

Note: These figures are more uncertain, as they are illustrative estimates based on projecting forward the more robust estimates provided by MREPs and making assessments of the effectiveness of various changes to the policy and administration of R&D tax credits described in this report.

1.3. Monitoring

Aside from the MREP, HMRC already has a rolling programme of analytical work to look at R&D reliefs. Every year HMRC publish updated statistics outlining how many claims were received, and the value of relief claimed. This includes breakdowns by region, industry sector, and size of claim. In due course HMRC will also publish a research report about the geographic spread of activities underlying tax reliefs including R&D and Patent Box.

HMRC’s management information also gives more real-time data on types of error and fraud occurring, and more granular data on claimants and agents. This helps inform HMRC’s internal understanding, as well as raising awareness externally. To improve transparency around HMRC’s approach on R&D reliefs, a number of pieces of this management information are published for the first time in this report in section 2.4. This includes data on claims, enquiries and customer experience indicators, which help illustrate the context and impacts of HMRC’s approach.

In addition to its internal programme of analysis and research, HMRC has also supported external bodies to carry out research on R&D data through the Datalab. This facility allows suitable applicants to put forward innovative and practical research projects, and if approved produce high-quality reports for HMRC as well as the researcher community and public. Four such projects on R&D tax reliefs have already been completed, with more in development.

2. Policy and operational changes to address error and fraud

This section summarises the measures taken to 2023 to 2024 to improve compliance in the R&D tax reliefs. Although the 2023 to 2024 ARA included an early estimate of error and fraud in that financial year, this is provisional and will be updated as MREP data becomes available. As mentioned in section 1, due to the data lag between policy and operational changes being made and being able to measure the impacts, it is too early to fully judge the impact of the measures set out in the following section.

2.1. Policy changes

Table 2: Policy changes

Measure	Implementation date
PAYE-related cap on size of claims by SMEs	Accounting Periods (APs) from April 2021
Requirements to notify HMRC of named company officer with responsibility for claims, and of the identity of any advisers used when compiling claims	Claims from August 2023
Requirement to give HMRC advance notification of claims	APs from April 2023
Requirements to claim digitally and provide additional information	Claims from August 2023
Removing the use of nominations for R&D tax credit payments/preventing any new assignments of R&D tax credits	Claims from April 2024/November 2023

The R&D tax reliefs were subject to review between Spring 2021 and Autumn 2023. The review considered the design and effectiveness of the various reliefs and concluded at Autumn Statement 2023, with the announcement of the merged scheme and changes outlined in the July 2023 report.

In August 2023 HMRC implemented the following changes:

• the requirement for each claim to be accompanied by additional information. Before this change was introduced, around half of claimants did not provide any extra information alongside their claim
• a requirement for all claims to be made digitally, making things easier for the customer and ensuring the information provided could be more easily examined by HMRC

These changes enable HMRC to risk assess, process and pay claims more effectively.

From April 2024, restrictions were placed on the use of use of nominations and assignments for R&D tax credit payments. This means R&D agents are no longer able to receive their client’s R&D tax credit payments using the nominations process, subject to limited exceptions. In addition, no new assignments of the right to receive R&D tax credits are now possible. These changes mean that payments will go directly to the claimant company, ensuring they receive the relief more quickly and have better oversight of the claim that has been made on their behalf. This will help reduce non-compliance within the scheme by reducing the financial incentive for agents to overstate claims. More than 90% of claims that are fraudulent or display some markers of fraud use nominee bank accounts.

2.2. HMRC’s compliance approach

HMRC’s approach to managing the R&D tax reliefs is based on the overarching strategy of preventing error and fraud from entering the system, promoting compliance and responding to non-compliance where it happens. HMRC:

• helps businesses get things right through better education and support, and by improving the process of making a claim
• takes proportionate action where it sees non-compliant claims, ranging from high-volume targeted activity where HMRC sees multiple customers making similar errors through to conducting criminal investigations where HMRC identifies potential fraud
• works closely with the agent community to raise agent standards and improve HMRC communications, guidance and insight and take decisive action in relation to agents who abuse the relief

Table 3: Helping businesses to get it right, and operational interventions

Measure	Implementation date
Risk assessment of claims enhanced to use new information from the Additional Information Form, a mandatory part of submitting an R&D claim	2023 to 2024 and 2024 to 2025
R&D Professional Bodies mailbox - a dedicated route for professional bodies to contact HMRC about R&D or any breaches in standards relating to R&D	Q1 2024 to 2025
Agent Educational Model – HMRC has assigned an Agent Relationship Manager to work closely with certain agents to improve their processes and claims	Q4 2023 to 2024
Webinars	2024 to 2025
Guidance improvements	Q3 to 4 2023 to 2024

2.3. Helping businesses get things right

Improving education and guidance

HMRC has carried out education campaigns for businesses most at risk of making incorrect claims. These campaigns are targeted at sectors where R&D is unlikely to be carried out, such as care homes, childcare providers, personal trainers, wholesalers and retailers, pubs and restaurants. HMRC knows that companies in these sectors are at risk of being approached by unscrupulous agents.

These education campaigns started with care homes. In July 2023, HMRC wrote to around 7,500 companies focusing on educating the sector on the criteria for qualifying R&D claims. These letters also signposted guidance, where to go for more help, and what to do, including how to contact HMRC, in the event that a company is approached by an agent who offers to submit a speculative claim in return for high commission.

HMRC has taken the following steps to ensure guidance stays relevant and useful for claimants:

• in October 2023, HMRC published Guidelines for Compliance on R&D. These help customers avoid common mistakes and errors when claiming and set out practical steps for customers to follow to ensure their claim is eligible. They help customers identify projects where some or all of the activities may qualify for R&D tax reliefs. They also help customers to understand what best practice looks like, to improve the quality of claims and reduce the risk of errors. This publication was well-received by stakeholders

• in December 2023, HMRC published updates to the Corporate Intangibles Research and Development (CIRD) manual following a review of its contents

HMRC has launched webinars which outline what qualifies as R&D, summarise recent policy changes, explain how these might affect how businesses submit their claims and promote the Guidelines for Compliance.

Illustrative case study

A small food restaurant business is persuaded by an agent to claim Research and Development (R&D) tax relief. The agent has minimal knowledge of their business, but after asking a few questions, suggests some business activities will qualify, such as recipe development. Of the £4,000 relief received, the agent takes £1,600 in fees. A year later, HMRC informs the business their claim wasn’t eligible, and they must pay back the £4,000 relief plus interest.

Under our expanded compliance approach, helping businesses get things right is more likely to prevent this claim. The business reviews the R&D Guidelines for Compliance watches the webinar online. These materials are designed to help customers make the right decision on if they are carrying out R&D eligible for relief. By reviewing this information before a claim is made, the business identifies that it has not carried out qualifying activity and does not make a claim.

2.4. Taking proportionate action

HMRC carries out targeted compliance checks proportionate to the risk and the customer behaviour and takes action where it sees non-compliant claims.

When HMRC receives an R&D relief claim, it goes through a risk assessment process. New additional information requirements mean HMRC can better target this process. This means more accurately identifying claims that may not be compliant and reducing the risk of valid claims being picked up for a compliance check. Where a check is opened into a claim that on further investigation is found to be fully eligible, HMRC aims to close its check and approve the claim as quickly as possible.

HMRC currently has over 500 people working on R&D compliance, compared with around 100 people in 2020 to 2021. This additional resource alongside the targeted risk-based approach has enabled HMRC to undertake more compliance checks into claims for R&D reliefs, especially those made by SMEs, reflecting the higher error and fraud rates in the SME population.

HMRC processed 92% of claims within 40 days in 2023 to 2024. This is above HMRC’s published customer service aim to process 85% of claims within 40 days of receipt. Processing means paying the claim, making contact to request further information, or refusing the claim, and, for claims identified as high-risk, starting an appropriately targeted compliance check.

Tailoring the approach

HMRC risk assesses to target compliance checks in a range of ways, considering the level of risk and the cost of the action.

Where HMRC requires more information to establish the facts, it will carry out a compliance check, to ask for additional information or records to establish if the project meets the definition of R&D.

Where HMRC sees similar mistakes made by large numbers of claimants, it undertakes high-volume targeted activity to contact customers and prompts them to correct the errors.

Where HMRC identifies high value or technically complex non-compliance, specialist staff will undertake more detailed examinations of the claims. HMRC’s R&D Anti-Abuse Unit undertakes compliance activity where there is suspected abuse of the relief. This can include abuse at both customer and agent level and sits alongside the work done by the fraud specialists within HMRC’s Fraud Investigation Service, who work on cases where HMRC suspects criminality.

For Large Business customers, the Framework for Co-operative Compliance means customers are encouraged to disclose any material uncertainty in their tax returns, including in R&D claims, to their HMRC Customer Compliance Manager prior to filing, allowing real-time consideration of claims. All claims made by Large Business customers are reviewed, with appropriate claims selected for a compliance check following risk assessment activity.

Compliance check framework

HMRC recognises the importance of certainty to businesses. It aims to identify the need for a compliance check early and, where possible, before any payment is made. Now that HMRC is receiving better data alongside claims, it can improve targeting to make this more achievable.

Depending on the type of risk or behaviour identified, HMRC will also open some compliance checks post-payment. Post-payment checks have the advantage of enabling customers to receive payment quickly but can result in uncertainty for customers about whether their claim might later be found to be non-compliant and their payment recovered.

Where risks are identified, HMRC opens checks within established legislative time limits. Generally, HMRC has 12 months from the date of the claim being submitted to open a check and the majority of compliance checks are opened within this time limit.

HMRC can also issue a tax assessment if it discovers an inaccuracy after the compliance check window has closed, and an officer could not reasonably have been aware of the inaccuracy based on the information available to them. This is referred to as a discovery assessment and the time limits for HMRC to make one are dependent on the behaviours that led to the inaccuracy.

When checks are conducted, customers will be provided with a contact number and email address for any questions or updates regarding the check. Where appropriate, meetings may be held with customers to discuss their views and HMRC’s position and to build understanding.

HMRC recovers any amounts claimed in error, where appropriate and in line with legislation. HMRC will consider inaccuracies identified in claims for earlier years when concluding their compliance checks and will seek to recover any amounts that had been incorrectly claimed in those periods where the relevant conditions for the use of HMRC’s discovery powers are met.

If HMRC identifies an inaccuracy in the R&D claim that led to an understatement of tax, or an overpayment of relief, it is legally required to consider whether an inaccuracy penalty is appropriate. HMRC will apply penalties where the error is because of a lack of reasonable care or deliberate behaviour. The level of penalty is linked to the behaviour that led to the error and the more serious the behaviour, the higher the maximum penalty can be.

Illustrative case study

In the illustrative case study described above and under our expanded compliance approach, the ineligible claim is more likely to be picked up by HMRC taking proportionate action. Through increased compliance coverage, now at 17%, there is an increased likelihood that the ineligible claim would be picked up for a compliance check, and not be paid out by HMRC where the claim is found to be non-compliant.

Using information from the Additional information form, HMRC to better target compliance efforts. This includes where high-volume targeted activity is appropriate. Typically, where HMRC see similar mistakes made by large numbers of claimants, it contacts customers at volume and asks that they correct errors within their claim before HMRC compliance check. Taking a volume-based approach is designed to address common risks identified.

Concluding the compliance check

As set out in HMRC’s Code of Governance, most tax disputes are resolved collaboratively and by agreement once the facts have been established and the point at issue clarified.

Where agreement is not possible there are other options to help resolve disputes:

• if a customer receives a decision letter from HMRC, they can ask for a statutory review by writing to HMRC within 30 days of receiving that letter, setting out what the customer disagrees with and why. The reviews teams are independent of HMRC decision makers and carefully consider each disputed decision before reaching a review conclusion
• in appropriate cases, Alternative Dispute Resolution (ADR) can be used to help resolve disputes either by facilitating agreement between the parties or by helping the parties to prepare for litigation
• following the conclusion of a review, customers have a period of 30 days in which to submit an appeal to the independent Tax Tribunal

Compliance checks: facts and figures ^{[footnote 1]}

HMRC has responded to increasing levels of error and fraud in the R&D reliefs by increasing the number of compliance checks carried out. Table 4 sets out how many checks were carried out, and the outcome of those checks ^{[footnote 2]}.

Key points to note are:

• HMRC increased its compliance coverage to 17% in 2023 to 2024, undertaking compliance checks on 9,700 claims
• HMRC identified £441 million had been incorrectly claimed in 2023 to 2024 as part of inaccurate claims to R&D reliefs through compliance checks, significantly reducing the amount of tax lost due to error and fraud
• of the total number of compliance checks settled, the vast majority (89%) were resolved by agreement with the claimant

Table 4: Compliance checks (note)

Compliance checks	2022-23	2023-24
Number of Claims received	90,000	61,000
Proportion of claims processed within 40 days	75%	92%
Number of Compliance Checks	8,300	9,700
Compliance checks as a proportion of claims (coverage)	10%	17%
Tax recovered from compliance checks	£288 million	£441 million
Average time to complete compliance check	269 days	246 days
Proportion of checks resulting in adjustment being required	71%	77%

Note: All figures rounded to nearest 100 and excluding cases dealt with by Large Business Teams.

Dispute Resolution

In 2023 to 2024, HMRC held 822 requests for an R&D statutory review. Some of these relate to requests received in 2022 to 2023. Of the 822 requests, 251 were concluded, of which in 214 cases the HMRC decision was upheld, 33 varied and fewer than 5 resulted in the HMRC decision being cancelled.

In 2023 to 2024, HMRC received 153 requests for ADR related to R&D claims. Of those cases that were concluded, there were:

• 22 cases where the dispute or issue in point has been fully resolved
• fewer than 5 cases have been partially resolved where a number of items have been in dispute and some of these have been resolved or clarified and progressed, and some remain outstanding
• 12 cases where the points in dispute and the actions needed to progress matters (for example an exchange of information) have been clarified
• fewer than 5 cases where no resolution has been reached

One R&D tax relief case progressed to hearing at tribunal in 2023 to 2024, which was decided in favour of HMRC.

Maintaining standards

In all cases HMRC officers are required to follow the standards in the HMRC Charter and HMRC’s Compliance Professional Standards, both of which are published on gov.uk. HMRC has acknowledged there have been some occasions where its service has fallen short of the standards set. HMRC always welcomes feedback and will work to make improvements where a customer raises concerns.

If a customer considers HMRC standards have not been met, they can complain using HMRC’s complaints procedure. If HMRC finds evidence to support the complaint, HMRC will uphold it and will consider refunding any reasonable costs directly caused by its mistakes or delays. If the customer disagrees with the outcome of the ‘first tier’ review, they can ask for their complaint to be reviewed a second time by a different person. After two complaint reviews in HMRC, customers can ask the Adjudicator’s office to review the complaint. If the customer is dissatisfied with the Adjudicator’s Office’s decision, they can ask an MP to send a review request or complaint to the Parliamentary and Health Service Ombudsman.

Maintaining standards: facts and figures

Table 5 sets out the data HMRC holds on the number of complaints received and the outcomes. The years relate to the date when the complaint was received or the decision on the complaint issued.

Key messages are:

• the number of complaints has increased between 2022 to 2023 and 2023 to 2024
• the number of complaints as a proportion of compliance checks remained less than 5% in 2023 to 2024
• the proportion of complaints upheld has risen, to around half

Table 5: Complaints and professional standards

Compliance checks	2022-23	2023-24
Number of claims received	90,000	61,000
Number of compliance checks carried out	8,300	9,700
Number of complaints received (in that year)	212	423
Number of complaint outcomes (in that year) (note)	122	475
Number of complaints upheld	67	207
Complaints referred to adjudicator	<5	<5

Note: Complaints may not be resolved in the year of receipt so some 2023 to 2024 outcomes will refer to complaints received in previous years.

Working with representative bodies and experts

HMRC is working with stakeholders on addressing feedback, including from complaints, to ensure it is meeting expected standards and addressing areas for improvement. HMRC has acknowledged and engaged with concerns raised by representative bodies around the compliance approach. In response to this feedback, HMRC has already set up projects focussing on capability and professionalism in R&D compliance activity, designed to provide confidence about:

• accessibility of guidance and communications
• clarity of HMRC’s letter writing
• consistent use of HMRC powers and penalties
• clearer escalation routes for complex technical matters, including where a meeting is required
• additional assurance on more complex cases

2.5. Agent standards

HMRC recognises agents play a vital role in the R&D tax reliefs regime with more than 90% of claimants having an authorised agent to act on their behalf.

HMRC, agents and the representative bodies collectively play a vital role in ensuring high quality accurate advice is given to claimants. However, there are some agents who provide poor or incorrect advice to customers about what they are entitled to claim. This can lead to spurious R&D tax relief claims being submitted by customers themselves or by agents on their behalf, thereby increasing non-compliance. 

Even if a customer uses a tax agent, they remain responsible for their own tax affairs. Therefore, if a customer is considering using an agent they should do their own research, checking reviews from other customers, whether they are accredited by a professional body, and what qualifications they have. Even if an agent looks legitimate, customers should always read the terms and conditions, read any disclaimers carefully, and make sure they fully understand any fees the agent will charge. HMRC has published further guidance on how to choose and agent.

In some cases, agents who have advised a customer, or have put in a claim on their behalf, are unwilling to engage with a subsequent compliance check. HMRC understands the impact it can have on claimants where a claim is subject to a compliance check and the agent stops acting on their behalf. In these circumstances, the claimant should get in touch directly with HMRC to resolve the compliance check.

HMRC does not regulate tax agents including those who advise on R&D claims, reinforcing the importance of choosing an agent carefully. That said, HMRC has powers to tackle agents who breach the agent standard, including but not limited to: refusing to deal with them, suspension of agents services accounts, publishing details of deliberate defaulters, dishonest conduct penalties and where appropriate, criminal prosecutions.

HMRC is taking targeted action to tackle R&D agents whose behaviour is clearly not acceptable, including through the work of the R&D Anti-Abuse Unit. Since 2023, the R&D Anti-Abuse Unit has been working with the Advertising Standards Agency to remove false advertising by some agents who claim their services are HMRC-approved; and contacting agents who are unregistered for Anti-Money Laundering supervision, prompting them to register to meet their legal and regulatory obligations, and outlining action that will be taken if they do not do so.

In addition, HMRC has launched an R&D Professional Bodies mailbox. This is in response to requests by tax professional bodies to have a dedicated route to contact HMRC about R&D tax reliefs or any breaches in standards relating to R&D tax reliefs. The information provided will be used to inform HMRC’s approach to tackling non-compliance and poor agent behaviours.

HMRC has also adopted an R&D Agent Educational Model, launched in January 2024 with the first letters issued in March 2024. Agents that have been identified as having submitted multiple claims with similar risks will be assigned an Agent Relationship Manager to work closely with them to improve their processes and educate them on common inaccuracies within their claims. In turn, the agents can make R&D claims with a greater confidence that they have provided HMRC with the necessary information to support a claim. This process does not mean agents are considered more favourably or that their clients are exempt from HMRC’s normal compliance processes, and nor does it mean HMRC is providing agents with accreditation. For those that refuse to participate, HMRC considers further necessary action to address any continued abuse of R&D reliefs.

Illustrative case study

In the illustrative case study described above and under our expanded compliance approach, the agent behaviour driving the ineligible claim is more likely to be identified and changed or prevented. For example, the agent in the case study could be invited to take part in the Agent Education Model and improvements to their claims, resulting in fewer ineligible claims being made.

Where abuse of the relief by the agent (or the claimant) is suspected, HMRC’s R&D Anti-Abuse Unit would undertake compliance activity. Where we have identified agents exhibiting serious behaviour, HMRC has a suite of powers and actions we can take ranging from education to criminal prosecution. The actions taken will vary depending on the behaviour exhibited by the agent.

Annex A: Value and rate of error and fraud

The tables below shows the estimated value and rate of error and fraud in small and medium-sized enterprise (SME) and Research and Development expenditure credit (RDEC) relief schemes, 2020 to 2021 to 2023 to 2024, as published in the HMRC 2023 to 2024 ARA.

Table A.1: Value of error and fraud

Value of error and fraud	Final estimates based on MREPs 2020-21 (£m)	Final estimates based on MREPs 2021-22 (£m)	Illustrative estimate 2022-23 (£m)	Illustrative estimate 2023-24 (£m)
SME scheme	1,038	1,203	1,003	475
RDEC scheme	90	134	48	125
Overall	1,127	1,337	1,051	601

Table A.2: Rate of error and fraud

Rate of error and fraud	Final estimates based on MREPs 2020-21 (%)	Final estimates based on MREPs 2021-22 (%)	Projected estimates based on estimates 2022-23 (%)	Projected estimates based on estimates 2023-24 (%)
SME scheme	24.4	25.8	19.5	14.6
RDEC scheme	3.6	4.6	1.7	2.8
Overall	16.7	17.6	13.3	7.8

Annex B: Further breakdown of data – second Mandatory Random Enquiry Programme

In the July 2023 report HMRC set out a number of themes in the MREP1 data. The section below provides an update against the themes based on 2020 to 2021 claims.

Theme 1: Customer behaviour

Consistent with the July 2023 report, there were fraud indicators in fewer than 10% of cases examined in MREP2, and these accounted for around 5% of the total value claimed. This again indicates that most non-compliance is due to other behaviours.

In cases looked at by the MREP:

• non-compliance as a proportion of the value of claims was 26%, which was around the same as in MREP1 (24%)
• the percentage of claims which were compliant were also similar, at 49% (50% in MREP1)
• 30% of claims were fully disallowed, as they were wholly non-compliant (no qualifying R&D activity took place). Methodological improvements mean this breakdown cannot be directly compared to MREP1 results
• in 21% of cases some R&D took place, but claimants had claimed more relief than they were entitled to

Theme 2: Size of expenditure

In claims where expenditure was over £1 million, 75% of claims were fully compliant (in line with the 74% reported in MREP1). In smaller claims (below £1 million), the percentage of claims that were fully compliant was lower at between 29% and 58%.

Table B.1: Analysis of claims received in 2021 to 2022 by size of expenditure on the SME R&D tax relief

Due to the amount of data presented, only part of the table below is visible. Please use the scrollbar at the bottom of the table to view all the columns.

Claim by size of expenditure (£000’s)	Number of claims received 2021-22	Value of claims (£m)	Percentage of claims in MREP which are compliant (%)	Percentage of claims in MREP wholly non-compliant (%)	Percentage of claims in MREP partially non-compliant (%)	Estimated value of non-compliance (£m)	Estimated percentage non-compliance, value of claims (%)
0-<10	8,800	10	56%	35%	10%	4	37%
10-<20	8,800	30	47%	43%	10%	20	50%
20-<30	8,900	50	57%	31%	11%	20	41%
30-<40	6,700	60	29%	41%	30%	30	51%
40-<50	4,500	50	58%	16%	26%	20	30%
50-<75	7,700	130	34%	36%	30%	70	53%
75-<100	3,700	90	53%	20%	27%	30	34%
100-<250	14,300	600	44%	33%	23%	270	43%
250-<500	10,200	880	51%	23%	26%	320	35%
500-<1,000	5,800	890	53%	17%	29%	260	28%
1,000+	4,800	2,330	75%	6%	19%	290	12%
All	84,300	5,100	49%	30%	21%	1,330	25%

Theme 3: Sectors

As in MREP1, HMRC carried out analysis based on Standard Industrial Classification (SIC) codes.

Again, the most compliant sectors were in claims where the main trade classification was manufacturing or professional services (where the non-compliance expressed as a percentage of the value claimed was 15% and 20% respectively).

Section 2.3 outlines what HMRC is doing to more effectively target communications to those in sectors which are unlikely to undertake R&D, to ensure they are aware of the rules.

Note that sectors given in the table below may not align with those given in the July 2023 report. The below is reflective of the MREP2 sample, and where there are fewer than 5 from any particular sector these have been grouped together in the ‘Other’ category in line with conventional statistical practices.

Table B.2: Sectoral breakdown of claims received in 2021 to 2022 by SMEs

Due to the amount of data presented, only part of the table below is visible. Please use the scrollbar at the bottom of the table to view all the columns.

Claim by size of expenditure (£000’s)	Number of claims received 2021-22	Value of claims (£m)	Percentage of claims in MREP which are compliant (%)	Percentage of claims in MREP wholly non-compliant (%)	Percentage of claims in MREP partially non-compliant (%)	Estimated value of non-compliance (£m)	Estimated percentage non-compliance, value of claims (%)
Accommodation/Catering	1,200	20	16%	57%	28%	20	91%
Administration	5,400	200	49%	44%	7%	50	26%
Construction	7,100	370	58%	22%	20%	100	27%
Finance	1,100	270	43%	44%	13%	110	38%
Information	22,200	1,800	56%	26%	17%	410	22%
Manufacturing	20,000	1,160	52%	26%	22%	180	15%
Professional	13,900	760	45%	28%	27%	150	20%
Other services	7,500	370	34%	38%	28%	170	44%
Wholesale/Retail	5,800	200	40%	33%	27%	130	64%
All	84,300	5,100	49%	30%	21%	1,330	25%

Theme 4: First time claimants

As in MREP1, there was a higher level of non-compliance from first time claimants, with 64% of the value of first time claims non-compliant, and 46% of claims from this group being wholly non-compliant. However, there was a higher level of partial non-compliance, 24% of claims, by those who were not claiming for the first time.

Section 2.3 outlines what HMRC are doing to support first time claimants. The impact of these measures will not be reflected in this data.

Table B.3: Analysis of claims received in 2021 to 2022 by whether a company has previously made a claim for R&D tax relief or whether the company is making a claim for the first time

Due to the amount of data presented, only part of the table below is visible. Please use the scrollbar at the bottom of the table to view all the columns.

Company claiming for the first time?	Number of claims received 2021-22	Value of claims (£m)	Percentage of claims in MREP which are compliant (%)	Percentage of claims in MREP wholly non-compliant (%)	Percentage of claims in MREP partially non-compliant (%)	Estimated value of non-compliance (£m)	Estimated percentage non-compliance, value of claims (%)
No	65,900	4,690	51%	25%	24%	1,030	21%
Yes	18,300	450	41%	46%	13%	290	64%
All	84,300	5,100	49%	30%	21%	1,330	25%

Theme 5: Use of agents when claiming R&D reliefs

In line with MREP1, around half of all companies used a specialist R&D agent. Overall, non-compliance (as a value of claims) was slightly higher in those claims that were submitted with the support of a specialist R&D agent.

In its recent consultation on raising standards in the tax advice market, HMRC published further analysis of MREP1 data showing whether agents used were affiliated or unaffiliated to a professional body. This showed that taxpayers using affiliated tax practitioners had a similar percentage of non-compliant cases when compared to other categories, but lower overall levels of non-compliance in terms of the percentage of expenditure and cost of relief.

Table B.4: Breakdown of claims by companies with an R&D agent

Claim by size of expenditure, £000’s	Percentage of claims with an R&D agent (%)	Number of claims	Value of claims (£m)	Percentage non-compliance, value of claims (%)
0-<10	48%	4,200	10	36%
10-<20	53%	4,700	20	41%
20-<30	42%	3,700	20	36%
30-<40	41%	2,700	30	31%
40-<50	70%	3,200	40	44%
50-<75	65%	5,000	80	51%
75-<100	59%	2,200	50	30%
100-<250	63%	9,000	400	57%
250-<500	53%	5,400	480	40%
500+	54%	5,700	1,600	16%
All	54%	45,800	2,730	28%

Table B.5: Breakdown of claims by companies without an R&D agent

Claim by size of expenditure, £000’s	Percentage of claims with an R&D agent (%)	Number of claims	Value of claims (£m)	Percentage non-compliance, value of claims (%)
0-<10	61%	5,400	10	39%
10-<20	45%	4,000	20	58%
20-<30	59%	5,200	30	40%
30-<50 (note)	49%	5,500	60	33%
50-<75	33%	2,500	40	54%
75k-<100	37%	1,400	40	41%
100-<250	35%	5,000	190	11%
250-<500	46%	4,700	400	28%
500+	45%	4,700	1,630	18%
All	46%	38,400	2,410	21%

Note: Analysis for expenditure between £30,000 to £40,000 and £40,000 to £50,000 have been combined due to small sample sizes.

1. The data provided in this document reflects the readily available data HMRC holds related to its R&D compliance activity. For some areas, we have this data for 2022 to 2023 and 2023 to 2024 but for others we only have data for 2023 to 2024, which is dependent on how we have tracked this data internally in our system. ↩

2. The years show the date the compliance check was opened or the dispute resolved and as HMRC carry out activity on a rolling basis these numbers will not fully reconcile. ↩