Anyone with a passing interest in corporation tax will be aware that there has been an increase in HMRC’s ‘compliance activities’ focusing on R&D claims. HMRC are using a range of powers to target ‘fraud and error’ in R&D claims, including ‘nudge letters’, unilaterally amending returns to remove claims, as well as opening enquiries. This activity is unlikely to abate in the short term given The National Audit Office’s recent criticism of HMRC’s administration of R&D relief and the resultant costs to the public purse.
For the last 12 months or so, HMRC’s approach to R&D enquiries has been one of volume. A central team handles the enquiries, and correspondence is not attributed to a specific individual. It’s fair to say that the approach has not met with favour from taxpayers or other interested bodies such as the CIOT. There have been seemingly valid concerns that the caseworkers are not appropriately trained and do not give the submitted responses due consideration. Previously taxpayers would be encouraged to have meetings with inspectors as a means of reaching an agreement regarding the qualifying status of R&D projects. The current approach does not allow for meetings and there instead seems to be an unwritten strategy of hoping that taxpayers revoke claims rather than pursue the dispute to its conclusion. The volume of enquiries also means that there are significant delays in having appeals considered and cases referred for independent review.
Although the process may be flawed, an enquiry from HMRC should not be ignored. So what should a company do when an enquiry letter lands on its doorstep (or in its email inbox)?
- Firstly, the enquiry needs to be taken seriously. It can be annoying that HMRC are asking questions that may have been addressed in a supporting R&D report, but you should aim to provide full responses to each question.
- HMRC typically expect a response within 30 days. If you feel unable to meet the deadline, ask for an extension at the earliest opportunity. HMRC can, unfortunately, be reluctant to agree to a realistic timeframe for a response. They may instead issue a formal schedule 36 notice, which brings with it exposure to penalties for non-compliance.
- HMRC’s enquiry letters lean heavily on the importance of ‘evidence’ that the claimant company undertook R&D in the period of the claim. Smaller, agile companies may not maintain detailed project records, but they should still aim to provide evidence of any type that supports the R&D claim. This may be work emails or informal notes, just anything that gives comfort that the R&D was ongoing in the period.
- Under HMRC’s new enquiry approach, it can seem as though they start with a presumption that smaller companies, or companies within a particular sector, do not carry out R&D. HMRC may also suggest that a company’s ‘competent professional’ does not have sufficient experience to be an expert in the field. We have also seen HMRC carrying out cursory google searches to find comparable products produced by other manufacturers to support their argument that a company is not seeking to achieve an advance in science and technology through its R&D. If you feel that HMRC are being unreasonable, you should push back and explain why you disagree with their statements.
- It may feel tempting to throw in the towel in the face of what can seem like entrenched views of HMRC. However, unless you feel HMRC have a valid case, you should seek to pursue the enquiry as far as possible. This will include appealing HMRC’s decision and requesting an internal review of HMRC’s decision. The volume of enquiries unfortunately means that the appeal and independent review process can be subject to delays. So it is important to be patient when awaiting a final decision.
- If you feel that HMRC have a point with their challenges, you should seek agreement to amending the claim at an early stage, rather than prolonging the process. If this also impacts on claims that are not under enquiry, you should make the necessary amendments at an early stage.
- Where HMRC assess additional tax, they must also consider penalties. Where a company took reasonable care in preparing and submitting an R&D claim, no penalties should be due. What amounts to reasonable care needs to be considered in the context of a company’s knowledge and resources. A larger company will therefore be expected to take greater steps than a smaller company. Where a company has placed reliance on advice from an appropriately qualified adviser, this will generally be seen as an indicator of reasonable care.
Where an R&D enquiry is opened, it should not be seen as an indicator of wrongdoing. HMRC disingenuously refer to ‘error and fraud’, but these are two separate and quite different behaviours. Errors can be innocent – or at worst, negligent – whereas fraud is a deliberate deceptive act. HMRC’s conflation of the two could be seen as part of a strategy to reduce the number of claims or otherwise garner support for their compliance activities. Companies undertaking R&D should not, however, be deterred from submitting claims. They should ensure that claims are properly documented, so as to reduce the risk of an enquiry. But they should also be able to pull together the necessary further supporting evidence in the event that an enquiry is opened.
