£4bn lost to fraud and error on flagship HMRC ‘innovation’ scheme

A government scheme designed to promote innovation and boost the economy has lost over £4 billion to fraud and error since 2020, due to widespread abuse.

The research and development (R&D) tax credits scheme, intended to drive world-leading innovation, has been plagued by dubious claims, turning into what experts describe as a “wild west”. Claims included a window-cleaning firm’s “groundbreaking” method to hold a water bucket at height, a pub adding vegan and gluten-free options to its menu, and businesses redesigning their corporate websites.

According to HM Revenue and Customs’ (HMRC) annual report, the estimated cost of fraud and error in the scheme totalled more than £4.1 billion from 2020-21 to 2023-24. HMRC reported that the reliefs expenditure in 2023-24 was £7.7 billion.

This revelation comes as Chancellor Rachel Reeves pledges to crack down on tax fraud and non-compliance, with Labour aiming to recover £5 billion in tax revenues by the end of the current parliament. Tax officials labelled the fraud and error in R&D tax reliefs as “clearly unacceptable”, promising public action.

Colin Hailey, a technology tax expert, testified to Parliament about abuses in the scheme more than six years ago. He criticised the lack of proper vetting by HMRC and noted the role of agents claiming hefty commissions for filing these dubious claims. “It was the wild west. These advisers were cold-calling firms and saying, ‘you don’t think you’re doing R&D, but we can help you’,” Hailey said.

Companies from various sectors, including care homes, pubs, fitness centres, and dental clinics, were inundated with calls from agents urging them to apply for the tax credits. A tax consultancy claimed to have saved a hotel and pub in Chester £28,000 for “innovative menus, catering for vegan and gluten-free diets”.

HMRC did not confirm whether such claims were legitimate. However, a House of Lords finance bill subcommittee heard in November 2022 that some advisers boasted a 99% acceptance rate of claims by HMRC, referring to the scheme as “free money”.

Introduced in 2000 to address declining R&D spending in Britain, the scheme reduces a firm’s corporation tax bill or provides a direct payment if the claim represents a significant advance overcoming scientific or technological uncertainty.

HMRC’s annual accounts reveal that error and fraud in the scheme cost £1.127 billion in 2020-21, £1.337 billion in 2021-22, £1.051 billion in 2022-23, and £601 million in 2023-24. An analysis of claims for small and medium-sized firms in 2021-22 estimated that about one in four contained errors or fraud, marking it as one of the highest rates of non-compliance among government spending programmes.

In response, HMRC is now rigorously checking claims and increasing compliance inquiries to recoup some of the lost billions.

An HMRC spokesperson stated: “We generated a record £843.4bn in tax revenues last year, up 3.6% on the previous 12 months. With R&D claims, public money is at stake, and taxpayers rightly expect us to scrutinise them. We do that thoroughly and fairly, and the overwhelming majority of valid claims are paid on time. But the levels of non-compliance within these schemes are clearly unacceptable, and the public rightly expect us to take action. This includes better help, guidance, and processes, as well as decisive action against the minority who deliberately set out to abuse the schemes.”

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