£4.1 Billion Lost to R&D Tax Fraud as Government Clashes Over Finances, according to HMRC

£4.1 billion of taxpayer money has been lost due to errors and fraud in the research and development tax schemes since they were introduced in 2020, according to HMRC’s latest accounts.

Critics argue that some companies are receiving tax breaks meant for research and development without doing any research and development work.

This issue arises amid a debate between the new government and the previous administration over a financial shortfall. Labour insists that cuts and tax increases are necessary due to undisclosed spending by the former government. Meanwhile, the Conservatives maintain that they were clear about the state of the public finances.

The tax relief schemes, initially separate but now merged, were created to reward businesses that invest in innovation, like technology or pharmaceutical companies. These schemes allowed companies to lower their corporation tax by offsetting their research and development expenses.

In April 2023, an “enhanced” scheme was introduced to further reduce taxes for small businesses that are making a loss. However, critics believe some businesses are fraudulently claiming these benefits without engaging in genuine research and development.

Jason Kurtz, CEO of Basware, commented: “Fraud is an issue keeping finance departments up at night and all organisations are subject to regular fraud threats, including HMRC. Fraudsters are funded like big businesses and are increasing the sophistication and volume of fraud attacks as a result, requiring increased investment and resources to protect against threats.”

“For fraud, prevention is always better than the cure. Organisations should implement AI-powered fraud prevention systems, trained on known indicators of micharaterized payments and vendor impersonation scams, to identify anomalies and allow teams to proactively step in.”