Non-compliance for SME’s identified at 24.4%, why the steep increase?

HMRC’s annual report for 2022/23 highlighted their efforts to retrieve lost revenues. With strategic objective 1 being “collect the right tax and pay out the right financial support” even individuals and businesses not avoiding, evading or misleading HMRC are falling under their spotlight.

We are aware of their increasing efforts into tax investigations, following the investment into their IT infrastructure and employee numbers – HMRC have been known to launch investigations into individuals and businesses that leads to little to no tax being recovered, following investigation.

SMEs looking to secure R&D tax relief have also fallen under the watchful eye of HMRC with a recent report on HMRC’s approach to R&D Tax Reliefs making interesting reading. The level of non-compliance for SME’s (based on their findings) has been reported at 24.4% (£1.04billion) compared to previously published estimates of 5.5% (£303 million).

Whilst one may question how reliable this level of non-compliance really is – you have to consider these numbers will include genuine compliant claims that companies have withdrawn on enquiry because the company does not have the time or the resource to respond to the onerous information requests being sent.

If HMRC actually implement their proposals for helping businesses get it right, such as ‘a programme of educational activity to support customers via one-to-many campaigns, improved guidance and educational webinars’ and ‘making further improvements to its guidance and will publish examples of eligible and non-eligible claims.’ Then this can only help businesses make the right judgements as to whether their projects meet the definition of R&D for tax purposes and submit compliant cases in the first instance.

As was noted in the recent report published by the House of Lords Economic Affairs Finance Bill Sub-Committee, the BEIS Guidelines are in need of updating as they have not been revised since 2010.  We therefore welcome any steps HMRC take to make improvements in this area of education and guidance on R&D which are long overdue.

If you are struggling to work out whether your projects meet the definition of R&D for tax purposes or what the recent changes mean for your business Wilson Partners can help. Please get in touch.