R&D Tax Relief: House of Lords calls for reforms

A new report into R&D Tax Relief from the House of Lords Economic Affairs Finance Bill Sub-Committee raises concerns over abuse of the regime by taxpayers.

The UK’s R&D tax reliefs have an important role to play in encouraging more businesses to invest in R&D, helping them to grow and create the technologies, products and services.

Proposed changes to the R&D tax system in April 2023, which we have previously highlighted, are unlikely to be effective on their own, the House of Lords report concludes, with recommendations for how HMRC's compliance approach could be improved.

The Sub-Committee reviewed evidence of an escalation in the abuse of R&D tax relief in recent years, fueled partly by claims from rogue advisers.

In its most recent accounts, HMRC estimated the amount of error and fraud in its two R&D schemes at £469 million (around 7% of total claims estimated for 2020/21 of £6.6 billion).

From April this year HMRC with require more detailed information about the nature of a claim for relief, naming any tax adviser involved in preparing claims and requiring that claims should be endorsed by a senior officer of the company.

Controversially, the new rules also introduce a requirement to give pre-notification of an intention to make a claim, which means that some companies will lose out as they will not realise they could have made a claim until it's too late.  

Key recommendations from the House of Lords

The reports main conclusions and recommendations are:

• Changes from April 2023 are not effective in isolation and improvements to HMRC’s compliance capability are also needed. This includes a more focused and targeted approach to identifying suspect claims, greater expertise and potentially more resource.


• Fraud and error could be mitigated before claims are made if HMRC improved the support it provides to businesses. This includes both its guidance and communications to increase awareness and understanding of the regime, and by expanding the existing Advanced Assurance process for claims by small and medium enterprises (SMEs).


• The Sub-Committee welcomed the extension of the range of qualifying expenditure for which R&D relief is available to include cloud computing and data licensing costs. It also welcomed the Government’s proposal to include pure mathematics within the scope of the definition for R&D.


• It recommends a form of transitional relief for overseas expenditure to help companies adapt to the changing rules, particularly for contracts which have already been entered into.


• The Department for Business, Energy and Industrial Strategy (BEIS) and HMRC should work together on a new awareness campaign to provide SMEs with clearer information about what is and what is not R&D for the purposes of a claim.

R&D changes from 1 April 2023

From 1 April 2023:

• the Research and Development Expenditure Credit (RDEC) rate will be increased to 20% from 13%,
• the SME deduction rate will be reduced to 86% from 130%, and
• the SME credit rate decreased to 10% from 14.5%

Ahead of the April 2023 changes, new guidance was issued in December 2022 on which comments are invited up to 28 February 2023.

However, the above House of Lords report expresses disappointment that detailed rules have not yet been published in draft, given the proximity of the rules taking effect.

It also notes that the new guidance issued under consultation will not be in a final form until March at the earliest, giving companies and advisors only a short time to understand it ahead of 1 April, creating an element of uncertainty in the meantime.

We have previously highlighted the key April 2023 changes in our earlier articles:

• R&D Tax Credit changes - good news and bad news
• Upcoming R&D Tax Relief changes

Proposed changes from 1 April 2024

The Government has also launched a consultation to streamline the UK’s two R&D tax relief systems into one scheme from 1 April 2024 .

The 8-week consultation, which runs to 13 March 2023 sets out proposals on how a single scheme could be designed and implemented.

It is proposed that a single R&D scheme would replace the two current R&D tax relief schemes:

• the Research and Development Expenditure Credit (RDEC) and
• the small and medium enterprises (SME) R&D relief.

Further information

If you want to find out more about R&D Tax Relief and how this can benefit your business, head over to our R&D Knowledge Hub or contact a member of our R&D team.