UK start-ups and small businesses have accused HM Revenue & Customs of putting economic growth and innovation at risk by rejecting legitimate requests for research and development tax relief, delaying payments and recovering debts.
Nine bosses told the Financial Times that the UK tax agency’s administration of the flagship government program left them exploring the idea of moving abroad or scrapping plans to create jobs or invest, while two others they said this stunted the growth of their companies.
The research and development tax credits are designed to support companies working on cutting-edge projects and form a crucial part of a wider Government commitment to make Britain a “tech superpower” by 2030.
Under the current scheme, first launched for small and medium-sized businesses more than two decades ago, companies can retroactively receive a tax credit owed 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 group to support the administration of the relief. Research and development policies have changed several times in recent years after authorities attempted to curb around £1.13 billion of fraud and errors in the system.
According to HMRC, £7.6 billion of R&D tax relief was claimed for the 2021-22 tax year, equating to £44.1 billion of R&D spending.
Matthew Millar, co-founder of Really Clever, said he is considering moving his operations abroad after the mushroom discovery platform was asked to repay £44,000 in relief, an HMRC claim which the company disputed.
“It is completely contradictory to want to become a technological superpower,” he said, adding that officials had denied a request to discuss the issue on a call.
“[The process] it just puts pressure on the whole situation that the company is in, resource-wise, that we have to explain it to investors [and . . .] our advice,” added Millar.
The chief executive of a software company – which moved to Britain partly because of the “large” research and development program – said his experience contributed significantly to his decision to relocate 30 management posts. I work abroad.
The person, who asked not to be named, said the company had been subjected to six rounds of questioning over a £1m compensation claim it received 20 months after the first claim.
“This lack of predictability is materially harmful,” the chief executive said, adding that in time more staff will be moved out of the UK. «All in all it’s a parody. I think this has undone 10 years of investment in making the UK a competitive place for start-ups.”
The most common complaints cited by businesses the FT spoke to included the amount of time it takes to investigate credit applications and HMRC repeatedly asking businesses for information they have already provided.
Darren Burn, chief executive of OutOfOffice.com, said the agency’s approach would “stifle innovation across the economy”, leaving businesses with no choice but to close.
Burns’ luxury travel business which caters to LGBT+ consumers has been under a compliance audit for 16 months, faces a bill to repay around £118,000 and has applied to a tribunal.
Ministers said in March that the new committee would provide insights into research and development in critical sectors, including technology and life sciences, and would work with HMRC to ensure guidance remained timely and give clarity to recurring.
Some of the companies who spoke to the FT accused the agency of a lack of expertise and errors in processing claims, echoing wider industry concerns.
Paul Rosser, director of consultancy firm R&D Consulting, said around 30 complaints he was involved in investigating over the past year had received responses from HMRC that misquoted the legislation or contained names, details or dates of wrong customer project.
He added that open source searches had been used to reject applications from some projects if officials had found what they thought was similar technology.
“[HMRC also] they weren’t taking it into consideration [that an online] Search today is different than it would have been when a client project began,” he said.
Paul Morey, chief executive of Herschel Infrared, said the heating company was told it owed more than £31,000 to the government despite not receiving the value of a cash R&D claim or a reduced tax bill from HMRC .
“It’s simply a complete miscarriage of justice,” he said, noting that the demand for payment had been put on hold while the company appealed.
HMRC had previously sent Morey a refusal letter referring to research and development requests for projects that did not concern the company, he added. “My perception is that the whole thing is a disaster. . . The way it has been dealt with is simply shocking.”
Companies whose R&D requests were unexpectedly rejected have been forced to change their business plans.
Steven Darrah, chief executive of Fuelled, said the insurance technology firm has cut research and development spending and has a smaller team than hoped after HMRC rejected a compensation claim for around £30,000.
The number of businesses failing to qualify for tax credits is “significantly impacting” economic growth, he warned, adding that the process was “really disheartening” and included a call with an inspector who “had no idea of what innovation was”.
HMRC said it recognized the importance of research and development in “promoting innovation and economic growth” and was “determined to ensure the claims process is simple for genuine claimants”.
He added: “We must ensure that claimants are entitled to the compensation they seek and will only seek to recover money where it has not 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 has been contacted for comment.