The UK government has lost £4.1 billion of taxpayer money due to errors and fraud in research and development (R&D) tax schemes since their introduction in 2020, according to HM Revenue and Customs (HMRC).

Critics claim that some companies are exploiting these tax breaks without engaging in genuine R&D activities. This controversy arises amidst a financial dispute between the current government and its predecessor. Labour argues that necessary cuts and tax hikes are due to undisclosed spending by the former administration, while the Conservatives assert they were transparent about public finances.

Initially designed to encourage innovation in sectors like technology and pharmaceuticals, the tax relief schemes allowed companies to reduce their corporation tax by offsetting R&D expenses. In April 2023, an “enhanced” scheme was launched to further benefit small businesses operating at a loss. However, concerns persist that some firms are fraudulently claiming these benefits.

Jason Kurtz, CEO of Basware, remarked, “Fraud is an issue keeping finance departments up at night, and all organisations, including HMRC, face regular fraud threats. Fraudsters, often as well-funded as big businesses, are escalating the sophistication and frequency of their attacks, necessitating increased investment in defence measures.”

Kurtz advises, “Prevention is always better than cure. Organisations should deploy AI-powered fraud prevention systems, trained on known indicators of mischaracterised payments and vendor impersonation scams, to detect anomalies and enable proactive intervention.”