18 Apr 2024

HMRC Enquiries and Strengthening your R&D Tax Credit Claim

Samuel Hutchinson
R&D Tax Consultant

Navigating HM Revenue & Customs (HMRC) enquiries or compliance checks concerning Research and Development (R&D) tax credit claims can be a significant challenge for businesses. At TBAT Innovation, we understand the complexities involved and the importance of building a robust R&D tax credit claim from the outset. In this article, we share our expert insights on dealing with HMRC enquiries while fortifying your R&D tax credit claim for success. 

Before delving into strategies for handling an HMRC enquiry, it is crucial to understand the enquiry process itself. Typically, HMRC may launch an enquiry to scrutinise the details of a company’s R&D tax credit claim, ensuring that the claimed activities meet the eligibility criteria and that the claimed expenditures are reasonable and related to qualifying R&D projects. 

 At TBAT Innovation, our consultants work closely with clients to compile detailed records of R&D projects, technical reports, timesheets, and expenditure documentation. By maintaining detailed records and ensuring that the claim accurately reflects eligible R&D projects and expenditures, businesses can pre-emptively address any queries that may arise during an HMRC enquiry. 

Engaging with HMRC Proactively

In the event of an HMRC enquiry, proactive engagement is key. As standard HMRC require responses within 30 days and so responding promptly to HMRC’s queries and providing clear and comprehensive explanations can demonstrate transparency and cooperation, fostering a positive dialogue with HMRC caseworkers.  

Seeking Professional Assistance

Given the complexity of R&D tax credit regulations and the intricacies of HMRC enquiries, seeking professional assistance from tax advisors or R&D tax credit specialists can be invaluable. At TBAT Innovation, our experienced R&D tax consultants provide expert technical and financial guidance and representation throughout the enquiry process. We assist clients in interpreting HMRC’s queries, preparing evidence to support the R&D tax credit claim, and representing them in discussions with HMRC caseworkers. 

Dealing with an HMRC enquiry serves as an opportunity for continuous improvement and learning. We analyse the outcomes of each enquiry to identify opportunities for enhancing future R&D tax credit claims, ensuring that our clients optimise their claim processes and minimise the risk of future enquiries. 

What are the reasons for an HMRC enquiry?

HMRC might initiate an enquiry into a company’s R&D (Research and Development) tax claim for several reasons. Here are some common reasons: 

  • Complexity or Unusual Nature of the Claim: If the claim is particularly complex or involves unusual R&D activities, HMRC might want to conduct an enquiry to ensure that the claimed activities indeed qualify as eligible R&D under the tax regulations. 
  • High Claim Amount:  A large or significantly increased claim amount might trigger scrutiny from HMRC. They might want to ensure that the claimed expenses are genuine and related to qualifying R&D activities. 
  • Inconsistencies in Documentation: If there are inconsistencies or discrepancies in the documentation provided to support the R&D claim, HMRC may launch an enquiry to clarify and verify the information. 
  • Lack of Supporting Evidence: If the company fails to provide adequate supporting evidence for the claimed R&D activities and expenses, HMRC may initiate an enquiry to gather more information and assess the validity of the claim. 
  • Previous Issues or Non-compliance: If the company has a history of non-compliance with tax regulations or has previously faced issues with R&D tax claims, HMRC might scrutinise future claims more closely, possibly leading to an enquiry. 
  • Industry or Sector-Specific Risks: Certain industries or sectors may be considered unusual R&D sectors and higher risk for incorrect R&D claims. For example, industries with a history of aggressive tax planning or where the definition of R&D is subjective might face increased scrutiny.

illustration of a man signing stamped claim letter using a red pen with folder document and blue background

What is the process for an HMRC enquiry?

After an R&D claim is submitted HMRC have 12 months, though in certain circumstances this can vary by a few months, to open a compliance check on the claim. If after the 12 months has passed, if new information arises then HMRC can go back up to 4 years after the relevant tax year. If the tax issue is due to careless or deliberate behaviour, then HMRC has 6 years and 20 years respectively to open compliance checks. A compliance check will start with a letter from HMRC and at each stage there will be a standard 30 days to respond, though extension to this timescale can be requested if needed for specific reasons. 

  • Compliance Check opening letter: HMRC letter will typically be around standard open questions asking for more details on the R&D claim, both technical and financial.  
  • Further Q&A stages: After the opening letter further questions, often focussing on specific elements of the claim, with evidence needed to HMRC. This can extend to 2, 3 or more rounds of questions. 
  • View of the Matter or Decision Letter: If HMRC still rejects some or all the claims then their assorted options available to claimants once a View of the Matter or Decision letter is received, which includes some or all the following. 
  • Alternative Dispute Resolution (ADR): At any stage of a compliance check a client can apply for ADR, which is a mediated meeting between HMRC and the company (with their tax advisor), which enables a direct TEAMS-hosted call with the HMRC caseworker. TBAT have found this to be effective at resolving the dispute, enabling the layperson HMRC caseworker to better understand the project and the R&D activities. 
  • SOLS team review: If your decision is appealable and still disagree with the tax decision you can request a statutory review carried out by HMRC Solicitor’s Office and Legal Services.  
  • Tribunal: The last stage of appealing a tax decision is applying for a First Tier Tribunal. At this stage costs can incur as it is recommended a barrister or solicitor is engaged to represent you.  

The full process of a compliance check can take months to over 2 years to resolve, depending on how many of the above steps are progressed through and the response times from HMRC.
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Workload and aggressive deadline causing exhaustion and burnout, overload or overworked office routine concept, tired businessman carrying heavy documents paperwork with alarm clock deadline on top.

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What are the outcomes for an HMRC enquiry?

If HMRC initiates an enquiry into a claim and it is resolved, the outcome will typically be one of the following:  

  • R&D claim processed without changes: HMRC is content that the company is engaging in qualifying R&D activities, and the claimed R&D expenditure supports this assertion. 
  • R&D claim processed with adjustments: HMRC isn’t fully convinced about all the costs or R&D activities included in the R&D claim, resulting in adjustments and a reduced claim or removal of certain elements. 
  • R&D claim rejected: HMRC determines that the company’s projects don’t meet the qualifying criteria, leading to the rejection of the R&D claim.  
  • HMRC Penalties: Significant issues of errors showing carelessness in the claim may prompt penalties from HMRC, but a recent tribunal has resulted in penalties being removed if the client has engaged competent expert advice from a suitable tax advisor, which could be an accountant or a company like TBAT Innovation providing R&D tax advice. 

As trusted R&D Tax consultants, we’re dedicated to assisting businesses in effectively managing HMRC enquiries and strengthening their R&D tax credit claims. By leveraging our technical and financial expertise, proactive engagement strategies, and commitment to continuous improvement, businesses can navigate through HMRC enquiries with confidence while maximizing the benefits of R&D tax credits to support innovation and sustainable growth. 

 

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