HMRC issues warning to retailers: Misleading R&D tax claims on the rise

R&D tax relief supports UK businesses by reducing tax liabilities or providing cash credits. For retail and e-commerce companies, this relief can be an essential source of project funding.

The scheme rewards companies that pursue authentic technical advancement, a trait found in many retail software solutions, whether aiming to gain a competitive edge or sustain cost efficiency.

However, HMRC is concerned about the levels of fraud and error in R&D claims. In the 2020–21 tax year, an estimated £1.13 billion (approximately 16.7% of total R&D tax relief claims) was lost due to non-compliance. Consequently, HMRC has heightened its scrutiny of claims, with 17% of claims being subject to checks in 2023/24 (increased from 10% in the previous tax year), resulting in processing delays for businesses.

HMRC has recently issued a ‘one to many’ letter to businesses in the retail sector regarding R&D tax credits. The campaign aims to protect businesses from misleading claims that rogue R&D tax agents make, which in turn leads to potential compliance risks and financial penalties.

Why has HMRC issued this letter on R&D claim eligibility?

There has been an increase in R&D tax credit claims from the retail sector, many of which do not meet the necessary technical criteria. HMRC is concerned that said agents are encouraging businesses to submit claims that do not qualify.

To this end, HMRC is clarifying its stance on R&D claim eligibility for the retail sector. It is also warning retail businesses to be cautious when approached by R&D tax agents who may misrepresent eligibility.

Key points for retail from HMRC’s letter affecting R&D tax claims

HMRC believes that too many claims in the retail sector do not meet the necessary requirements. However, it recognises that retailers and e-commerce companies in this sector may engage in genuine R&D to develop or integrate technical solutions.

The letter lists common activities that HMRC has identified as not qualifying for R&D tax relief, such as customer research or simply implementing standard solutions for e-commerce or stock management.

Consulting a trusted R&D adviser who has proven experience with claims in the retail sector helps companies in the sector determine whether these generous R&D incentives are available for their technical projects.

What should retail businesses do?

HMRC’s campaign highlights the importance of due diligence when claiming R&D tax credits. Retail businesses should stay informed, seek expert guidance and ensure compliance to avoid potential risks. To start with, they should:

• review any existing R&D claims to ensure they meet HMRC’s criteria;
• be cautious when engaging with R&D tax agents and verify their credentials;
• seek professional advice from trusted tax specialists to ensure compliance;
• understand HMRC’s definition of R&D and ensure that any claim is backed by genuine innovation and qualifying activities.

Help from the experts

If you have any concerns about your retail R&D tax relief claims, consult Moore Kingston Smith‘s specialist R&D tax team . We have extensive experience in preparing efficient and robust claims within the retail sector, and in helping companies preserve their R&D benefits through intensive compliance checks.