R&D Tax Relief Claims Scrutiny – Latest HMRC update

We wrote a little while ago about HMRC’s increase in compliance activity in Research and Development (R&D), as well as the changes in the R&D process.

In terms of HMRC activity, we have now been involved with a significant number of cases and HMRC is taking a very hard line.

Why is HMRC looking at R&D claims?

The R&D relief regime was lightly policed by HMRC for many years. From 2020 to 2021 HMRC undertook a ‘Mandatory Random Enquiry Programme’ (MREP) into 500 R&D claims. From the results of those enquiries, HMRC took a view that there were a significant number of claims that did not qualify.

Details of what HMRC found can be read here: HMRC’s approach to Research and Development tax reliefs

In brief, HMRC found that no qualifying R&D activity took place in 25% of claims and it went on to disallow those claims. HMRC’s analysis is provided in the page linked above, so we won’t cover that detail here. From the MREP, HMRC concluded that there was a significant problem within the world of R&D claims. Some have argued that the sample size may not have been large enough for HMRC to draw accurate conclusions. Whether HMRC’s conclusions hold up to statistical scrutiny or not, HMRC has acted on what it believes to be some significant issues.

What has HMRC’s approach been?

HMRC commenced a two-pronged approach:

Firstly, part of the Individuals and Small Business Compliance (ISBC) unit has opened enquiries en-masse into claims. It is likely that these have been profiled based on the types of claims in the MREP that showed the most significant volume of errors. HMRC has ramped up this approach and usually there is no named inspector working on a case. Rather, it appears that these are handled by whoever picks up the enquiry from a work list. Of these cases, HMRC is apparently concluding that around 60% of claims don’t qualify.

Secondly, HMRC’s Fraud Investigation Service (FIS) has sent letters in relation to claims it believes may be fraudulent. From what we have seen, these tend to be claims by loss making companies that generate cash repayments, rather than just a tax relief. In the first instance, the focus of these enquiries is typically to check whether the expenditure has been incurred, and not just the technicalities of whether the project qualifies.

What is the Problem with HMRC’s approach?

As the Chartered Institute of Taxation (CIOT) noted in an open letter to HMRC, the approach taken appears to have been dogged by errors and significant difficulty in communication with HMRC.

The CIOT’s letter can be found here: The Chartered Institute of Taxation (CIOT) letter to HMRC on R&D tax relief enquiries

Some of the problems noted in this letter include what appears to be, a lack of understanding of the R&D regime from the individuals running the enquiries, as well as difficulties in communication, administrative errors by HMRC, incorrect application of the penalty regime and generally poor conduct. Generally, these concerns are also reflected across the R&D industry. Of course, HMRC is entitled to enquire into claims, but the approach taken is considered by many to be substandard.

We have had interactions with senior people at HMRC who are involved in the project and, to give them credit where specific issues have been identified, HMRC has taken them seriously. However, given the size of the project, HMRC continues to make mistakes. It appears that HMRC’s view of what might be considered an ‘advance in science or technology’ is at odds with the views of many in the industry. It also seems that, in some cases, the evidence demanded by HMRC to demonstrate the expertise of a ‘competent professional’ is impossible to meet. Further, for a regime that in part is addressed at the ‘SME’ community, the size of the demands for information and documents has in many cases been disproportionate.

What Can Be Done?

Firstly, before any enquiry, it is essential to ensure that the report supporting a claim clearly and simply articulates how and why the project qualifies for R&D tax relief. HMRC has commented to us that a common issue is claims that focus on a product that derives from the R&D, rather than the scientific or technological advance that was being sought.

When responding to an enquiry, it is essential to clearly set out how the project hits the BEIS/DSIT guidelines. You need to establish the baseline, and also that the competent professional is indeed ‘competent’. The advance in technology or science should be clearly described.

If a product was derived from the R&D undertaken that is helpful context, but focussing on the product, rather than the underlying science or technology, may be missing the point (from HMRC’s perspective) in many instances. The BEIS guidelines are more detailed than just these points and there may be other aspects and commentary on how certain defined terms have been met, but we would recommend ensuring that the first few points in the guidelines are clearly covered as a starting point.

If HMRC concludes that a project does not qualify, or that a claim is incorrect, there are always the appeal, review, ADR and Tribunal options available if you disagree. However, it is always important to be mindful of time limits if a case has reached to this stage, as HMRC is generally reluctant to allow late appeals. If there are administrative or behavioural problems displayed by HMRC, complaining is always an avenue to consider.

Having Problems?

If you are having problems with an HMRC enquiry into R&D (or any enquiry), our team of experienced ex-HMRC inspectors can help. Whether it is helping you frame your arguments to clearly articulate how the criteria have been met, or with help appeals or complaints, we can assist you and/or your client.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email joe.mcdermott@intaxltd.com.