Question to the HM Treasury:

To ask the Chancellor of the Exchequer, with reference to the Autumn Statement 2022, published on 17 November 2022, whether the £1.340 billion stated to be gained by the Treasury in 2027-28 through adjustments to research and development Tax Credit relief includes a decrease in the (a) total and (b) percentage of fraudulent claims under both (i) SME scheme and (ii) businesses claiming Research and Development Expenditure Credit scheme.

At Autumn Statement 2022 the Chancellor announced that as part of the ongoing review of R&D tax reliefs, the Government is reforming the reliefs to ensure taxpayers’ money is spent as effectively as possible. The R&D expenditure credit (RDEC) is better value than the SME scheme but has a rate that is less internationally competitive. Also, there is significant error and fraud in the small and medium-sized enterprises (SME) scheme, with the generosity of the relief making it a target for fraud. The Government is therefore rebalancing the rates of the reliefs.

For expenditure on or after 1 April 2023, the RDEC rate will increase from 13 per cent to 20 per cent, the SME additional deduction will decrease from 130 per cent to 86 per cent, and the SME credit rate will decrease from 14.5 per cent to 10 per cent. These Autumn Statement 2022 rate changes will be legislated for in the Autumn Finance Bill 2022.

This reform will save £1.3 billion per year by 2027-28. A description of the methodology used to estimate the revenue impact of changes to R&D tax relief policy can be found on pages 28 and 49 of the Autumn Statement policy costings note: Autumn_Statement_2022_Policy_Costings_.pdf (publishing.service.gov.uk). The forecasts of policy change impacts are based on R&D expenditure by businesses qualifying for R&D tax reliefs and do not refer to a ratio of public to private R&D.

The OBR-certified forecasts of the Exchequer impact of rebalancing the generosity of reliefs include an estimate for reductions in error and fraud. Based on HMRC estimates, error and fraud in the SME scheme is adjusted downwards from the current 7.3 per cent to around 6 per cent in future years, reflecting an expected reduction in error and fraud due to the change in rates and resulting in savings of £200m to £300m over the scorecard. Work is currently being undertaken by HMRC to better understand error and fraud in R&D tax reliefs and this could show current level of error and fraud are underestimated.

To qualify for R&D relief, the work must be part of a specific project to make an advance in science or technology. The Government has assessed the R&D definition used for the purpose of claiming tax reliefs as part of the R&D tax relief review, launched in 2021. At Spring Statement 2022, the Government announced that from April 2023, the R&D definition will expand to include pure mathematics. This is to support the growing volume of R&D underpinned by mathematical advances. The definition and its expansion to include pure mathematics applies to both RDEC and the R&D SME scheme.