HMRC asks businesses to pay back R&D tax relief

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Date: 12 March 2024

An innovative small firm my be asked to repay R&D tax credits

Thousands of small businesses have been asked to pay back the R&D tax relief they received in recent years as part of an HMRC crackdown on error and fraud.

The BBC is reporting that HMRC is "reassessing past research and development (R&D) tax relief claims, after underestimating the level of error and fraud over many years". According to the BBC, thousands of businesses have been asked to pay back the tax relief they were given under the R&D scheme because HMRC has now reassessed their original claim.

"These retrospective challenges on R&D tax relief are widespread in the start-up community and crippling." Dom Hallas, executive director, Startup Coalition.

R&D tax credits were introduced in 2000 to incentivise companies to innovate by giving them tax relief on investment in new technologies. However, HMRC estimates that more than £1bn was lost to error and fraud in tax relief to smaller businesses in 2020/21 alone.

HMRC told the BBC: "We recognise the importance of R&D in driving innovation and economic growth and we are determined to ensure that the claims process is straightforward for genuine claimants. We have to make sure that claimants are entitled to the reliefs they claim and will only seek to recover money where it hasn't been claimed in accordance with the law."

Last year, chancellor Jeremy Hunt announced reforms to the R&D tax relief scheme as part of a crackdown on fraudulent claims. According to research conducted by R&D claims platform EmpowerRD, 59% of R&D claims were either challenged or declined by HMRC in 2023.

Now, it seems that HMRC is seeking to recoup some of the tax relief from businesses that benefited from the scheme in the past few years. The BBC has highlighted the case of optometrist and entrepreneur Dhruvin Patel who has been asked to return £49,000. Patel, the founder of Ocushield, received the money in 2022 for work during 2020/21 on a new lighting product. In January 2023, HMRC sent him a "notice of enquiry", informing him that a compliance check on his claim found similar products already in existence. The dispute is now going to arbitration.

"It's very clear that HMRC is mishandling its approach to past and present R&D claims in a way that undermines the innovative small firms who are needed if we are to grow our economy. The tax authority needs to recognise the importance of a predictable and supportive tax environment for those businesses at the cutting edge of technological change, which are increasingly small firms." Tina McKenzie, policy chair, Federation of Small Businesses (FSB).

Written by Rachel Miller.

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