Ian Davie
Senior Consultant
CIOT (Chartered Institute of Taxation) as a professional accounting body have previously raised concerns with HMRC through open letters sent in July 2023 and December 2023. Over the last 2-3 years HMRC have been more active in trying to route out fraud and boundary pushing claim for R&D tax credits. This has resulted in a volume compliance approach, where up to 20% of R&D claims are being scrutinized by HMRC through compliance checks.
The concerns addressed in the letters have focused on several key areas related to HMRC’s approach that affect their charter (as outlined on the HMRC Charter – GOV.UK), including insufficient engagement with claimants through reliance solely on letters, due and appropriate consideration of an R&D claim, poorly trained caseworkers, overuse of penalties, and the use of Paragraph 16 of Schedule 18 in FA 1998 to correct obvious errors to remove an R&D claim from accounts. This has resulted in meetings between the two parties to explore jointly working together:
In a letter sent May 2024 CIOT continues to highlight areas that HMRC needs to improve, with a synopsis of this letter here:
CIOT highlighted the recent news articles through the BBC and Financial Times that highlighted the ongoing negative issues faced by taxpayers and agents in navigating HMRC activities.
The volume compliance approach, with up to 20% of claim being investigated, is an attempt to reduce fraud, boundary pushing and errors. It is known that 90% of claim are supported by an agent, and still HMRC estimate that 50% of claim have errors to varying degrees in total claims.
Following a meeting with HMRC in January 2024 CIOT re-iterated the need for all claims to have a fair review, but HMRC need to tackle error and fraud prevalent in the scheme while managing risk. This is resulting in ‘collateral damage’ impacting genuine claims, which HMRC have previously acknowledged is happening.
The target for CIOT and HMRC to work together on this issue is to cover the following:
CIOT and HMRC met again in April 2024.
HMRC continue to work internally to improve escalation routes to identify the right cases, through caseworker training, triaging of enquiries and utilising more experienced caseworkers for cases to be referred up, to avoid collateral damage.
HMRC are due to publish a compliance action plan, though no date has been set for this. The plan will include addressing many of the issues raised by CIOT and the Public Affairs Committee, along with intended reporting and milestones for review. However, this has been talked about since the last RDCF (R&D Communication Forum) in December.
Making data accessible would be valuable for evaluating the effectiveness of the compliance strategy and assessing any collateral damage that may arise. This transparency would benefit agents and other stakeholders by providing a clearer understanding on what is happening. This could focus around SOLS review and ADR (Alternative Dispute Resolution). The outcome of which could direct HMRC in the training needs for caseworkers.
Efforts to enhance agent standards are underway, including a broader consultation aimed at elevating tax advice quality across the board, including R&D agents. However, the need remains to improve the quality of R&D tax relief claims through enhanced education for agents and taxpayers. Additionally, plans were announced at the last RDCF in December for R&D Agent Compliance Management, which would involve collaborative efforts with agents to improve practices and accuracy of claims, although no further details have been provided since then.
CIOT remind their members of the importance of PCRT (Professional Conduct in Relation to Taxation), which is an agreed code of practise between the accountancy professional bodies and HMRC. CIOT are working alongside other professional bodies to see how this could be updated reflecting new compliance requirements.
CIOT encourages HMRC to tackle bad agents, which can be referred through Tax Disciplinary Board, and to share information where possible to raise standards. There is also new professional bodies mailbox to contact HMRC to report any breaches in standards specifically related to R&D, which is for members of professional bodies specifically, though advice using with caution regarding professional obligations and confidentiality.
HMRC have announced the upcoming launch of a dedicated R&D disclosure facility, expected to be operational by June. There are already multiple ways companies can make a disclosure and HMRC should ensure that taxpayers are aware of all the available options.
One area HMRC have listened is Paragraph 16 letters, for the correction of obvious errors, which raised concerns around frustration and unprofessional conduct by HMRC without sufficient expertise. In future these letters will refer to s1138 of the Corporation Tax 2010. Though I still think that making a change to accounts because it was an obvious error to include an R&D claim is wrong!
CIOT will continue their dialogue and sharing information on the impacts of their volume compliance approach, particularly around companies withdrawing claims, as HMRC sees this as a win and preventing fraud, the impact on insurance premiums and the general willingness to submit claims.
Previous letters and the May 2024 letter from CIOT to HMRC can be found here :
CIOT update for members on R&D compliance activity and HMRC engagement (tax.org.uk)
TBAT Innovation will continue to pursue and support appropriate compliance checks on R&D claim, both claims prepared by TBAT and by others where appropriate. Though our compliance rate is still low, at an estimated 3-5% of TBAT prepared claims, but not the 20% overall, we hope this reflects the effort TBAT puts in to substantiate clients claims at the submission stage.
Of the compliance checks we do see, there are still issues around caseworker understanding of projects and the interpretation of R&D. For example, a recent interaction with HMRC we were told that for software R&D could not take place using an existing software language!
On compliance of agents there is lots going on, including the planned R&D Agent Compliance Management team, the Tax Advisor consultation, and the requirement to provide tax agent details on the Additional Information Form. These efforts aim to provide HMRC with a clearer understanding of agents’ roles in errors, boundary-pushing, and fraud.
Though at the moment this has not yet translated into improved practices among caseworkers, who continue to demonstrate misunderstandings, lack of knowledge, and incorrect interpretations of facts and legislation. This situation negatively impacts legitimate claimants and discourages companies from making claims or investing in R&D in the UK. There is still a long way to go.
On the same topic, read our article unpacking HMRC’s response to the July 2023 CIOT letter here.
If you would like to speak to a member of the TBAT team regarding R&D Tax Credits, get in touch using the form below.
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