Navigating HMRC's R&D Tax Credits

Following The National Audit Office's recent critique of HMRC's handling of R&D tax relief and its financial impact on the public, HMRC is reviewing R&D scheme claims to target ‘error and fraud’. Employing various measures, including ‘nudge letters’, they are amending returns, cancelling claims, adjusting tax relief, and opening enquiries to address issues related to R&D tax credits. It is looking like this heightened focus on ‘compliance activities’ and the recent R&D tax relief changes is going to continue for the foreseeable future.

HMRC R&D Claim Reviews

Valid concerns have been raised about the adequacy of training for caseworkers and their lack of thorough consideration of submitted responses, which is crucial when evaluating if tax incentives have been appropriately claimed. Over the past year or so, R&D tax relief claims have seemed to be focussed on quantity rather than quality. Enquiries are handled by a central team without specific consideration of individuals, including SMEs.

This approach has been criticised by taxpayers and organisations like the CIOT. Previously, taxpayers, including SMEs and large companies, were encouraged to engage in meetings with inspectors to resolve disputes over the eligibility of HMRC tax credit claims. However, the current approach eliminates these and instead seemingly relies on the hope that taxpayers, particularly SMEs, will withdraw claims rather than pursue disputes to resolution. The high volume of enquiries has also led to significant delays in processing appeals and referring cases for independent review, thus increasing administrative expenditure.

While acknowledging potential flaws in the process, it's a must that you do not disregard an enquiry from HMRC, especially concerning R&D tax credits. When a letter arrives, whether by post or email, your business should take prompt action.

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6 steps you should take when dealing with R&D reviews:

1. Answer all questions, even if they have already been addressed

We know it may feel like a waste of time to answer questions that you already have covered in your R&D tax credits claim. However, it is important that you answer each of these with full responses.

2. Keep the deadline in mind

Usually, HMRC allows 30 days for a response. If you know you cannot make that deadline, asking for an extension (usually up to a week) is possible but it may raise chances for penalties for non-compliance.

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3. Keep your Research and Development evidence at hand

HMRC R&D reviews are heavily focussing on evidence surrounding research and development during the period of the claim. Although SMEs may not keep as detailed records of projects and reports, it is essential to provide whatever you can find to help support your claim. This can include emails and even informal notes.

4. Push back unreasonable statements

HMRC sometimes goes off the assumption that SMEs do not carry out R&D or that businesses are not trying to advance technology through their projects. They may also suggest that the professionals in your company do not have sufficient experience to be considered an ‘expert’. If you find any of these applicable, don’t be afraid to respond to HMRC with your reasoning why you believe these statements are false.

5. Pursue the enquiry as far as possible

It may seem tedious and you may want to give up, but it is essential that you push your claim as far as you can. You can do this by appealing HMRC tax incentive decisions and requesting internal reviews. It is important that you stay patient when waiting on decisions as there is a delay in reviews due to the volume of claims, which affects the overall expenditure involved in the process.

If you think HMRC's concerns are valid, it's best to address them promptly by seeking agreement to amend the claim early in the process. If this adjustment affects other claims not currently under scrutiny, it's important to make the necessary changes without delay.

6. Take reasonable care

HMRC must consider penalties when reviewing additional tax. If a company exercised reasonable care in preparing and submitting an R&D claim, no penalties should apply. Determining what constitutes reasonable care depends on the company's knowledge and resources. Larger companies are expected to take more extensive measures compared to smaller ones. If a company relied on advice from a qualified advisor, it's generally considered an indication of reasonable care.

Overview

If an R&D tax relief enquiry is initiated, it shouldn't be automatically interpreted as evidence of wrongdoing. HMRC states that the focus of the review is ‘error and fraud’. Along with others, we believe that this is rather deceptive or misleading in the context of genuine R&D expenditure. ‘Error’ could be an innocent mistake, even on their behalf, while fraud is a deliberate attempt of unlawful behaviour.

HMRC's blending of the two could be interpreted as a tactic to decrease the number of claims or gain backing for their compliance efforts. Nevertheless, companies involved in R&D shouldn't be discouraged from making claims. It's important to thoroughly document claims to minimise the likelihood of an enquiry, particularly when it comes to substantiating deduction details. However, they should also be prepared to gather additional supporting evidence if an enquiry is initiated.

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How Can We Help?

At Pulse, we understand the importance of innovation for small businesses in the UK. That's why we offer specialised R&D (Research and Development) relief services to help eligible companies maximise their tax incentives and reinvest in their growth. Our experienced team works closely with clients to identify qualifying R&D activities, prepare robust claims, and navigate the complex regulatory landscape. With our guidance, businesses can access valuable tax relief opportunities, fuel innovation, and drive competitiveness in their respective industries.