HMRC undermining innovation by failing to award R&D tax credits, say start-ups


UK start-ups and small businesses have accused HM Revenue & Customs of putting economic growth and innovation at risk by rejecting legitimate claims for research and development tax relief, delaying payments and clawing back credits.

Nine bosses told the Financial Times that the UK tax agency’s administration of the flagship government scheme had left them exploring moving overseas or scrapping plans to create jobs or invest, while two more said it had stunted their companies’ growth.

R&D tax credits are designed to support companies that work on cutting-edge projects and form a crucial part of a wider government pledge to make Britain a “tech superpower” by 2030.

Under the current scheme, first launched for small and medium-sized enterprises more than two decades ago, companies can retrospectively receive a payable tax credit or reduce their tax bill for new or existing projects.

In Budget documents this month, chancellor Jeremy Hunt said HMRC would set up an expert advisory panel to support the administration of the reliefs. R&D policies have changed multiple times in recent years after authorities attempted to curb an estimated £1.13bn of fraud and error in the system.

According to HMRC, an estimated £7.6bn in R&D tax relief was claimed for the 2021-22 tax year, which corresponded to £44.1bn of R&D expenditure.

Matthew Millar, co-founder of Really Clever, said he was considering moving its operations abroad after the fungal discovery platform was asked to repay £44,000 in relief — a request by HMRC that the company disputed.

“It is completely contradictory to wanting to be a tech superpower,” he said, adding that officials had denied requests to discuss the claim on a call.

“[The process] just pressurises the entire situation the business is in, from a resource perspective, for us having to explain it to investors [and . . .] our board,” Millar added.

The chief executive of a software company — which relocated to Britain in part because of the “great” R&D scheme — said its experience had contributed significantly to its decision to move 30 jobs overseas.

The person, who asked not to be named, said the company had undergone six rounds of questioning for a £1mn claim that was received 20 months after it was first applied for.

“This lack of predictability is materially damaging,” the CEO said, adding that more staff would be moved out of the UK in time. “All in all it’s a travesty. I think it’s undone 10 years of investment in making the UK a competitive place for start-ups.”

Common grievances cited by the businesses the FT spoke to included the amount of time it takes to investigate claims for credits and HMRC repeatedly asking companies for information they have already provided.

Darren Burn, chief executive of OutOfOffice.com, said the agency’s approach would “stifle innovation across the whole economy”, leaving companies no option but to close.

Burns’ luxury travel business that caters to LGBT+ consumers is 16 months into a compliance check, faces a bill to repay about £118,000 and has applied to a tribunal.

Darren Burn
Darren Burn, chief executive of OutOfOffice.com © OutOfOffice

Ministers in March said the new panel would provide insights into R&D across critical sectors, including technology and life sciences, work with HMRC to ensure guidance remained timely and give clarity to claimants.

Some of the businesses that spoke to the FT accused the agency of lacking expertise and producing errors in its processing of claims, echoing wider industry concerns.

Paul Rosser, director at advisory firm R&D Consulting, said about 30 claims he has been involved with as part of inquiries in the past year received responses from HMRC that misquoted legislation or had the names, details or project dates of clients incorrect.

He added that open-source searches had been used to dismiss claims for some projects if officials found what they thought was similar technology.

“[HMRC also] weren’t taking into consideration [that an online] search today is different to how it would have been when a client’s project started,” he said.

Paul Morey, chief executive of Herschel Infrared, said the heating company had been told it owed more than £31,000 to the government despite not receiving the value of an R&D claim in cash or a reduced tax bill from HMRC.

“It’s just a complete miscarriage of justice,” he said, noting that the demand for payment had been paused while the company appealed.

HMRC had previously sent Morey a rejection letter referring to R&D claims for projects that did not relate to the company, he added. “My perception is the whole thing is a mess . . . The way it’s been dealt with is just shocking.” 

Paul Morey
Paul Morey, chief executive of Herschel Infrared © Herschel Infrared

Companies whose R&D claims have been rejected unexpectedly have been forced to change their business plans.

Steven Darrah, chief executive of Fuelled, said the insurance tech start-had cut spending on R&D and had a smaller team than hoped for after HMRC turned down a claim for about £30,000.

The number of businesses failing to qualify for tax credits was “significantly impacting” economic growth, he warned, adding that the process had been “really disheartening” and included a call with an inspector who had “no idea what innovation was”.

Steven Darrah
Steven Darrah, chief executive of Fuelled © Fuelled

HMRC said it recognised the importance of R&D in “driving innovation and economic growth” and was “determined to ensure that the claims process is straightforward for genuine claimants”.

It added: “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.”

The agency did not comment on the cases of the businesses that spoke to the FT.

The Department for Science, Innovation and Technology was contacted for comment.



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