02 Feb 2024

Navigating a HMRC Compliance Check: What to expect

Callum Dennis
R&D Tax Consultant

The journey to claim R&D tax credits is a promising endeavour for many businesses in the UK. These tax incentives aim to encourage innovation and growth by rewarding companies that invest in research and development activities. However, the path to securing these credits is not always smooth, and one hurdle businesses may encounter is a compliance check from HMRC (Her Majesty’s Revenue and Customs), commonly called a HMRC Enquiry, regarding their R&D tax credit claim.

In this blog post, we will explore what to expect when your company’s R&D tax credit claim is under HMRC scrutiny and how to navigate through the process.

 

Understanding the HMRC Compliance Check

Receiving an enquiry from HMRC does not necessarily mean your claim is invalid. HMRC routinely reviews R&D tax credit claims to ensure they meet the eligibility criteria and comply with the BEIS (now DSIT) guidelines. The compliance check may be triggered for a specific reason such as incomplete documentation or an atypical SIC code for R&D firms, but it is most likely to be a random spot check.

 

Responding Promptly and Thoroughly

The first step when facing an HMRC enquiry is to respond promptly and thoroughly. HMRC typically requests additional information or clarification on certain aspects of your R&D tax credit claim within 30 days of the date on their letter – which might not be the same as the date you receive it. It is important to address their queries promptly and provide comprehensive responses. TBAT prepare claims to contain the information that will be requested initially in a compliance check, streamlining this process, should it occur. However, we can also support companies who have claimed themselves, or with another agent, and have received an enquiry on their claim.

Unfortunately, there is no guarantee of timely responses from HMRC and there can be delays between rounds of letters. It is typical to have a couple of letters back and forth with HMRC before they begin forming a decision. We are seeing very draconian views taken by HMRC case workers that do not line up with the way the R&D tax relief schemes were promoted a few years ago. This can lead to strain and anguish for a company and their Directors when a claim was made in good faith, believing the company did legitimate R&D. TBAT are able to support at any stage of this process. We can contextualise the responses from HMRC and guide you through the options available, which may include taking the case to Alternative Dispute Resolution (ADR) or First-tier Tribunal. TBAT have successfully challenged HMRC’s view of R&D claims for several companies and had their claim rightly accepted by HMRC. Find out more 

 

Collaborating with Your R&D Tax Specialist

Having an experienced R&D tax specialist from TBAT Innovation on your side can significantly ease the process of responding to HMRC enquiries. Our R&D Tax Consultants are well-versed in the intricacies of the R&D tax credit schemes and can help you navigate through the complex documentation requirements. Our team help to ensure that your responses to HMRC are accurate, complete, and aligned with the guidelines. We will also advise our clients of what records to keep in the event that HMRC ask for further evidence in a compliance check.

 

Common Areas of HMRC Scrutiny

Understanding the common areas that often come under HMRC scrutiny can help you prepare a robust R&D tax credit claim from the outset. The principle question that HMRC has to be satisfied with is ‘Does the project qualify as R&D in accordance with the BEIS/DSIT guidelines?’.

To answer this question, evidence must be provided to highlight the advance in science or technology and the technological uncertainties involved in the project. This is information that TBAT’s consultants will work with you to collate during the preparation of your claim.

When HMRC are satisfied with the qualifying activity in a project, attention will turn to categories of expenditure. HMRC may scrutinise the financial figures in your claim to verify that they match the activity reported and qualify against the guidelines. This can also include requests for bank statements and invoices to prove that costs were incurred.

If the R&D projects included subcontracted work, it is likely that HMRC will ask to see relevant contracts and invoices to demonstrate what was being asked of the subcontractor and what was known about the R&D.

 

Conclusion:

While an HMRC enquiry on your R&D tax credit claim may seem daunting, it is important to try to approach the process with a proactive mindset. By responding promptly, collaborating with R&D tax specialists, and ensuring thorough documentation, you can increase the likelihood of a successful resolution. The key is to view the compliance check as an opportunity to strengthen your claim and showcase the genuine innovative efforts your company has undertaken. With the right approach, businesses can navigate through the scrutiny process and continue to reap the benefits of R&D tax credits in the UK. And the smoothest way to navigate the process is to have an experienced advisor, like TBAT, in your corner. If you would like support with an HMRC Enquiry you have received into an R&D tax relief claim, please contact one of the team right away.

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