The cost to genuine claimants

1Summary

A claim that should not have been made costs more than the credit wrongly paid. Tax authorities respond to high levels of incorrect claims with measures that apply to everyone: more information with each claim, more claims checked, longer reviews, slower payments and, in some cases, a less generous incentive. The businesses that bear those costs include the ones whose claims were right all along.

The clearest official record comes from the United Kingdom. HMRC estimated error and fraud in its SME scheme for 2021 to 2022 at 25.8 percent of the expenditure in that scheme.1 It then required more information with every claim, increased its compliance staff about fivefold, checked 17 percent of claims, and took an average of 246 days to complete a check in 2023 to 2024.1 Through the Finance Act 2023 the government reduced the SME payable credit rate, in part as a response to the error and fraud estimates.2

In the United States, the IRS has required specific information with every research credit refund claim since January 2022.3 For the employee retention credit, a different credit, it stopped processing new claims in 2023, and the National Taxpayer Advocate reported lengthy delays for eligible businesses.45

This paper sets out that record, considers where fee structure fits within it, and states plainly what the record does not show. It does not suggest that incorrect claims are caused only, or mainly, by contingent fees. Swanson Reed's position is stated once, in a labeled box.

2The question

Every tax incentive carries some risk of incorrect claims. HMRC states that "Any scheme that provides financial support to large numbers of claimants contains an inherent risk", and that the government "must balance making the process to claim the reliefs quick and easy with the need to ensure that only eligible claimants benefit".6 This paper asks what happens to the claimants who are eligible when that balance shifts because many claims are found to be wrong.

It looks for three kinds of cost in the official record: compliance checks and information requirements that reach all claimants; slower payments; and changes that make an incentive less generous. It describes other countries factually and makes no recommendation for any country other than the United States.

3United Kingdom: the clearest record

3.1What HMRC found

HMRC introduced a mandatory random enquiry programme, a full audit of a random sample of SME claims, to measure non-compliance. Its first results, for 2020 to 2021, raised the estimate of error and fraud in the SME scheme from a previously published 5.5 percent to 24.4 percent.6 The estimate for 2021 to 2022 was 25.8 percent in the SME scheme and 4.6 percent in RDEC, or £1.3 billion overall.1 HMRC found that around half of SME claims in 2021 to 2022 were non-compliant in part or in full, and 30 percent wholly so.1

HMRC was careful about what this meant. Fraud indicators appeared in fewer than 10 percent of cases examined, and HMRC said this "indicates that most non-compliance is due to other behaviours", ranging from mistakes and failure to take reasonable care to deliberate non-compliance.1 The National Audit Office has qualified its audit opinion on HMRC's accounts because of error and fraud in these reliefs every year since 2019 to 2020.2

3.2More checks for everyone

HMRC responded by expanding its compliance work. It had over 500 people working on R&D compliance by 2024, compared with around 100 in 2020 to 2021.1

Measure	2022 to 2023	2023 to 2024
Claims received	90,000	61,000
Compliance checks	8,300	9,700
Coverage (checks as a share of claims)	10%	17%
Average time to complete a check	269 days	246 days
Checks resulting in an adjustment	71%	77%
Claims processed within 40 days	75%	92%
Complaints received	212	423
Complaints upheld	67	207

Source: HMRC, Approach to Research and Development tax reliefs 2023 to 2024, Tables 4 and 5, excluding large business cases.1

The figures cut both ways. Most checks found something to adjust, which suggests HMRC was largely checking claims that needed it. But nearly a quarter of checks in 2023 to 2024 did not result in an adjustment, and a check took about eight months on average.1 Complaints doubled, and the share upheld rose to around half. HMRC acknowledged "there have been some occasions where its service has fallen short of the standards set", and set up projects on the clarity of its letters and the consistent use of its powers in response to concerns from representative bodies.1

HMRC also explained the cost of checking claims after payment: post-payment checks let customers receive payment quickly "but can result in uncertainty for customers about whether their claim might later be found to be non-compliant and their payment recovered".1 It said that better information with claims means "reducing the risk of valid claims being picked up for a compliance check", and that where a check finds a claim fully eligible it aims to close the check "as quickly as possible".1

3.3Disputes

Where a claimant disagrees with HMRC's decision, the dispute itself is a cost. In 2023 to 2024 HMRC held 822 requests for a statutory review of an R&D decision, some received in the previous year. Of the 251 concluded, HMRC's decision was upheld in 214 cases and varied in 33, and fewer than 5 decisions were cancelled. HMRC received 153 requests for alternative dispute resolution on R&D claims in the same year.1 These figures do not show how many disputes involved claims that were correct, but each represents time and professional fees for the business concerned.

3.4More information from every claimant

From August 2023 every claim must be made digitally and supported by an additional information form, and a named company officer and any advisers must be identified. From April 2023 first-time claimants and those returning after a gap must notify HMRC in advance.16 HMRC said that before the change "around half of claimants did not provide any extra information alongside their claim".1 These requirements apply to every claimant, whether or not its claim is at risk.

3.5Payment times

HMRC aims to process 85 percent of claims within 40 days. In 2022 to 2023 it processed 75 percent within that time; in 2023 to 2024, 92 percent.1 In 2023 it said that, as a consequence of payment identification and verification controls applied to all claimants, it "continues to aim to pay 85% of payable claims within 40 days".6

3.6Less generous rates

The National Audit Office records that the Finance Act 2023 increased the RDEC rate from 13 percent to 20 percent, reduced the SME additional deduction from 130 percent to 86 percent, and reduced the SME payable credit rate from 14.5 percent to 10 percent, from April 2023. It states that the changes were designed to make the two schemes more similar, and that the legislation "was, in part, a response to the estimated level of error and fraud for the SME scheme being considerably higher than for the RDEC scheme".2 From April 2024 the schemes were merged, with additional relief for R&D intensive SMEs.2

A loss-making SME that claimed correctly before April 2023 therefore received less for the same expenditure after it, partly because of the claims of others. Payable relief had already been capped from April 2021 at £20,000 plus 300 percent of a company's PAYE and National Insurance liability, a measure HMRC said was aimed at offshore companies with little or no UK operations.6

3.7Fewer claims

Claims fell from 83,240 for 2021 to 2022 to 65,690 for 2022 to 2023, and SME claims fell by around 23 percent. HMRC found the largest reductions in value among claims with expenditure below £20,000 and in sectors where it would not expect large volumes of R&D claims.1 The record does not show how many genuine claimants stopped claiming.

4Other countries

4.1Canada

In 2012 Canada's Department of Finance described the cost side directly. It said that contingency fees had been criticized for encouraging "aggressive positions that push the bounds of the law", and that, "If true, this practice would increase the costs for the Canada Revenue Agency to administer the SR&ED tax incentive program, in addition to increasing the overall fiscal risks".7 It added that "high compliance and administration costs reduce the 'net welfare gain'" of the program, which a 2007 Finance working paper had estimated at 11 cents for every dollar of tax expenditure.7 In 2022 the CRA reported a recent increase in claims containing false or non-compliant information.8

5United States

5.1Research credit refund claims

In October 2021 the IRS announced that research credit refund claims would have to include specific information to be valid. It explained: "Each year, the IRS receives thousands of R&E claims for credits in the hundreds of millions of dollars from corporations, businesses, and individual taxpayers. Claims for research credit under IRC Section 41 are currently examined in a substantial number of cases and consume significant resources for both the IRS and taxpayers."9 Since January 2022 every such claim must identify the business components, the research activities and the qualified expenses, and the IRS gives taxpayers 45 days to perfect a claim it finds deficient.3 The requirements apply to every refund claim, however strong.

For tax years beginning after 2025, most claimants must also complete Section G of Form 6765, reporting information by business component for at least 80 percent of qualified research expenses, up to 50 components. Taxpayers with qualified research expenses of $1.5 million or less, average gross receipts of $50 million or less, and a credit reported on an original return are exempt.10 The IRS estimates the average time for recordkeeping for the form at 10 hours and 31 minutes.10

5.2The employee retention credit

The employee retention credit is a different, refundable credit, and this section is not evidence about research credit claims. It is the most recent federal example of what happens to genuine claimants when a credit attracts many incorrect claims.

In September 2023 the IRS stopped processing new claims, citing "a flood of improper Employee Retention Credit claims".4 For existing claims, it said its standard processing goal would move from 90 days to 180 days, and could be much longer if a claim faced further review or audit. The Commissioner said that aggressive marketing "is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants."4

In June 2024 the IRS said its review of more than 1 million claims found 10 to 20 percent in the highest-risk group and 60 to 70 percent showing "an unacceptable level of risk", with 10 to 20 percent low risk. It said it "continues to be concerned about small businesses waiting on legitimate claims", but that payments would go out "at a dramatically slower pace". It kept the moratorium on later claims in place, saying that "These claims are clogging the system for legitimate taxpayers."11

In her 2024 annual report to Congress, the National Taxpayer Advocate listed the delays first among the ten most serious problems facing taxpayers. She wrote that there "have been lengthy delays in the payment of eligible claims submitted by employers that, in some cases, are depending on ERC refunds to remain in business", and that the IRS had a backlog of about 1.2 million claims as of 26 October 2024.5

The IRS connected those costs to how claims were sold and paid for. It warned that "a promoter can collect a contingency fee of up to 25% of the ERC refund", and urged businesses to use a trusted professional, "not a promoter or marketer hustling to get a hefty contingency fee".4

5.3The payroll tax offset

For research credits used against payroll tax by qualified small businesses, TIGTA reported in April 2026 that the IRS "still does not have processes to address ineligible taxpayers" who claim the credit, while stating that most claimants are eligible. It noted that erroneous credits reduce the funding paid to Social Security and Medicare.12

6How the costs reach genuine claimants

Drawing the record together, the following is analysis. Incorrect claims reach genuine claimants through four channels.

Information. Requirements introduced to identify bad claims, such as the UK additional information form and the federal refund claim requirements, apply to every claim.13
Checks. More checks mean more correct claims are checked. In the UK, nearly a quarter of checks in 2023 to 2024 found nothing to adjust, and checks took about eight months on average.1
Time. Payments slow when an authority must screen a high volume of risky claims, as the employee retention credit showed.45
Generosity. Where error is concentrated in one scheme, governments may reduce what that scheme pays, as the United Kingdom did.2

7Where fee structure fits

The record does not show that contingent fees cause most incorrect claims. HMRC found that most non-compliance in its sample was not fraud, and that claims with and without specialist agents were non-compliant at broadly similar rates for the largest claims.16 Many causes contribute, including mistakes by claimants themselves.

What the record does show is that several authorities have identified the way advisers are paid as one factor. HMRC restricted payments of credits to agents to reduce "the financial incentive for agents to overstate claims".1 Canada's Department of Finance recorded concern that contingency fees encourage aggressive positions that raise administration costs.7 The IRS linked the employee retention credit backlog to promoters charging contingency fees.4 Treasury and the IRS have proposed treating contingent fees for preparing returns and refund claims as disreputable conduct because "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits"; that proposal is not final.13

A fee that rises with the claim is not the only source of overstated claims. It is one that can be removed without changing the credit itself.

8The case for success fees

The case for success fees, set out in its strongest form, is also an argument about genuine claimants.

Success fees bring genuine claimants in. Many small businesses that qualify would not claim without an adviser willing to work at no upfront cost. Restricting contingent fees could reduce claims by exactly the businesses the credit is meant to reach.

Compliance tools are the right response. Tax authorities can target risky claims with information requirements, risk assessment and penalties, as HMRC has done. Those tools address bad claims directly, whatever the fee.

The evidence is not specific. No official source shows that claims prepared on contingent fees are wrong more often. HMRC's figures show high error rates among small claims with and without specialist agents.6

These arguments deserve weight, and nothing in this paper suggests that advisers who charge success fees prepare incorrect claims.

9Answering the case

9.1Access does not depend on a percentage

Low upfront cost can be offered through fixed, capped or staged fees. The access argument supports affordable pricing, not pricing that rises with the claim.

9.2Compliance tools have costs of their own

The United Kingdom's experience shows what compliance tools cost when error is high: more information from every claimant, more checks of correct claims, longer reviews, more complaints and lower rates.12 Removing one incentive toward overstated claims reduces the need for those measures, and their cost to genuine claimants.

9.3Better targeting helps, but does not remove the cost

HMRC's own account shows that better information lets it target checks more accurately and reduce the risk of valid claims being checked.1 Targeting depends on information that every claimant must provide, and it still leaves some correct claims checked. Measures that reduce the number of overstated claims in the first place reduce the work that targeting has to do.

9.4The absence of data is itself a gap

It is true that no official source compares claims by fee type. No federal form records how a claim's preparer was paid, so the comparison cannot be made from official data.10 The argument for reform rests on the incentive and on the official statements above, and is offered on that basis.

Our position

Congress should prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41, so that advisers are paid for the work they perform rather than for the size of the claim they produce. Removing that incentive would not prevent every incorrect claim, but it would remove one pressure toward the overstated claims whose costs fall on genuine claimants. Swanson Reed, which publishes this paper, is a fixed-fee R&D tax adviser. It has a direct commercial interest in the outcome: it does not charge success fees, and a ban would remove a pricing model it competes against.

10What the record does and does not show

What the record shows:

In the United Kingdom, high measured error and fraud was followed by more information from every claimant, more and longer checks, and a lower SME payable credit rate adopted partly in response.12
For the employee retention credit, the IRS slowed and then stopped processing, and eligible businesses waited.4115
Federal research credit refund claims carry information requirements that the IRS adopted because such claims consumed significant resources for the IRS and taxpayers.93
Several authorities have identified adviser pay as one factor in claim quality.174

What the record does not show:

How much of any authority's measured error is attributable to contingent fees.
How many genuine claimants have been checked, delayed or deterred, in the United States or elsewhere.
Any official measure of the cost of compliance measures to correct federal research credit claimants.

Those gaps limit what can be said. The costs described here are documented; their causes are shared among many factors, of which fee structure is one that official sources have named.

References

HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), sections 1.1, 1.2, 2.1, 2.4 (including Tables 4 and 5) and 2.5, Annex A and Annex B, Theme 1. https://www.gov.uk/government/publications/hmrcs-approach-to-research-and-development-tax-reliefs-2023-to-2024/approach-to-research-and-development-tax-reliefs-2023-to-2024 (accessed 11 October 2026). Back
National Audit Office, Report by the Comptroller and Auditor General: HM Revenue & Customs 2023-24 Accounts, paragraphs 2.10, 2.19 and 2.20. https://assets.publishing.service.gov.uk/media/6889f286048fff613a4d5b72/Report_by_the_Comptroller_and_Auditor_General.pdf (accessed 11 October 2026). Back
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and question 7 (page last reviewed or updated 1 October 2026). https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (accessed 11 October 2026). Back
Internal Revenue Service, News release IR-2023-169 announcing a moratorium on processing new Employee Retention Credit claims, 14 September 2023. https://www.irs.gov/newsroom/to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-questionable-claims-concerns-from-tax-pros (accessed 11 October 2026). Back
National Taxpayer Advocate, Annual Report to Congress 2024, Executive Summary: Preface and Highlights, Preface, summary of Most Serious Problem 1. https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/12/ARC24_ExecSummary.pdf (accessed 11 October 2026). Back
HM Revenue and Customs, HMRC's approach to Research and Development tax reliefs (published 17 July 2023), sections 1.1, 1.2, 2.1 and 3.1, and section 3.2, Themes 1 and 5. https://www.gov.uk/government/publications/compliance-approach-to-research-and-development-tax-reliefs/hmrcs-approach-to-research-and-development-tax-reliefs (accessed 11 October 2026). Back
Department of Finance Canada, Consultation Regarding the Impact of Contingency Fees on the Effectiveness of the SR&ED Tax Incentive Program (2012), section "Effects of Contingency Fees", archived copy of 7 May 2013. https://web.archive.org/web/20130507033404/http://www.fin.gc.ca/activty/consult/sred-rsde-eng.asp (accessed 11 October 2026). Back
Canada Revenue Agency, Advisory for businesses claiming SR&ED investment tax credits (12 October 2022). https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2022/advisory-businesses-claiming-sred-investment-tax-credits.html (accessed 11 October 2026). Back
Internal Revenue Service, IRS sets forth required information for a valid research credit claim for refund, News release IR-2021-203, 15 October 2021. https://www.irs.gov/newsroom/irs-sets-forth-required-information-for-a-valid-research-credit-claim-for-refund (accessed 11 October 2026). Back
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), "Requirements To Complete Section G", "How To Complete Section G" and "Paperwork Reduction Act Notice". https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Internal Revenue Service, IRS enters next stage of Employee Retention Credit work; review indicates vast majority show risk of being improper, News release IR-2024-169, 20 June 2024. https://www.irs.gov/newsroom/irs-enters-next-stage-of-employee-retention-credit-work-review-indicates-vast-majority-show-risk-of-being-improper (accessed 11 October 2026). Back
Treasury Inspector General for Tax Administration, Controls for the Qualified Small Business Payroll Tax Credit Were Updated, but Ineligible Taxpayers Continue to Receive the Credit, Report Number 2026-408-012 (15 April 2026), Highlights. https://www.tigta.gov/sites/default/files/reports/2026-04/2026408012fr.pdf (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, notice of proposed rulemaking, REG-116610-20, 89 FR 104915 (26 December 2024), Explanation of Provisions part B. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026; a Federal Register docket search on that date showed only the proposed rule). Back

Cite this paper

Summary

1Summary

2The question

3United Kingdom: the clearest record

3.1What HMRC found

3.2More checks for everyone

3.3Disputes

3.4More information from every claimant

3.5Payment times

3.6Less generous rates

3.7Fewer claims

4Other countries

4.1Canada

5United States

5.1Research credit refund claims

5.2The employee retention credit

5.3The payroll tax offset

6How the costs reach genuine claimants

7Where fee structure fits

8The case for success fees

9Answering the case

9.1Access does not depend on a percentage

9.2Compliance tools have costs of their own

9.3Better targeting helps, but does not remove the cost

9.4The absence of data is itself a gap

10What the record does and does not show

References

About this paper

Cite this paper

Summary

1Summary

2The question

3United Kingdom: the clearest record

3.1What HMRC found

3.2More checks for everyone

3.3Disputes

3.4More information from every claimant

3.5Payment times

3.6Less generous rates

3.7Fewer claims

4Other countries

4.1Canada

5United States

5.1Research credit refund claims

5.2The employee retention credit

5.3The payroll tax offset

6How the costs reach genuine claimants

7Where fee structure fits

8The case for success fees

9Answering the case

9.1Access does not depend on a percentage

9.2Compliance tools have costs of their own

9.3Better targeting helps, but does not remove the cost

9.4The absence of data is itself a gap

10What the record does and does not show

References

About this paper

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