In July, The Chartered Institute of Taxation (CIOT) penned a letter to HMRC expressing its deep-seated concerns regarding HMRC’s handling of its expanding R&D Tax Credit investigation program, particularly its “volume compliance” approach. In response to members’ grievances, the CIOT’s letter raised doubts about HMRC’s adherence to its own Charter.
Subsequently, HMRC has acknowledged its shortcomings in managing certain R&D claims, admitting “where HMRC’s response has not met its professional standards and Charter commitments” that it has fallen short of the standards and its own Charter. To address these issues, HMRC intends to enhance its internal training and assurance processes. HMRC has conceded that implementing reforms and corrective measures “will have an impact on compliant claimants”.
While HMRC’s acknowledgment of problems is a step in the right direction, it is disconcerting that legitimate R&D claimants are now inadvertently caught up in the investigation campaign. Furthermore, HMRC implies that these issues are isolated incidents rather than indicative of a systemic flaw in the current system, which raises concerns about the persistence of flawed approaches.
In this article, we delve into two specific aspects of HMRC’s response that are likely to cause unease among both R&D claimants and the advisory community:
The initial CIOT letter expressed concerns about HMRC’s refusal to meet with R&D claimants to resolve inquiries. HMRC justifies its decision by citing the high volume of claims and the perceived risks of non-qualification or inflation. However, this approach contradicts HMRC’s own guidelines that emphasize the importance of meetings in the enquiry process. The reluctance to engage in dialogue with claimants suggests that HMRC may be obstructing legitimate discussions and hindering the resolution of issues.
The letter confirms HMRC’s updated estimates of errors and fraud within the SME and RDEC R&D schemes. HMRC believes that a staggering half of all R&D claims are non-compliant, with this figure rising to 75% for claims under £10,000. Experts familiar with HMRC have voiced scepticism about these statistics, suggesting that they may be based on a flawed interpretation of R&D guidelines (DSIT Guidelines). They argue that HMRC may be underestimating the number of R&D claims that are abandoned due to claimants’ reluctance or inability to challenge HMRC’s decisions. This raises concerns about the accuracy of the data and the potential for self-fulfilling justifications.
In summary, despite HMRC’s assurances, the CIOT remains concerned that HMRC’s volume-based approach to managing R&D enquiries may lead to the rejection of valid claims, undermining the objectives of fostering innovation and economic growth in the UK. The House of Lords Finance Bill sub-committee report on R&D Tax Credits also recommended that HMRC address criticisms of its compliance activities, including its inconsistent approach and reluctance to engage constructively with taxpayers and their agents.
Rather than addressing these internal issues, HMRC appears to be casting doubt on the entire R&D advisory community by repeatedly highlighting that “around 90 percent of R&D claims involve an agent” and linking this to its belief that “half of all claims are non-compliant.” This lack of trust in the advisory community further erodes the relationship between HMRC, taxpayers, and their agents, ultimately discouraging legitimate claims and undermining the intended policy goals of encouraging R&D activities among SMEs. This situation is far from desirable.
In the dynamic landscape of R&D tax relief schemes, a pivotal change has quietly disrupted the routine of many R&D claim providers—the introduction of the Additional Information Form (AIF).
The recent Autumn Statement officially announced the merger of the R&D tax relief schemes, scheduled to take effect from 1st April 2024, for accounting periods starting after this date.
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