In light of HMRC’s inquiry of 50% of R&D tax relief applications and criticism of inexperienced case workers. Riocard Hoye, senior manager at Haysmacintyre, and partner Danielle Ford discuss how businesses should handle an investigation.
R&D expenditure credit (RDEC) for bigger enterprises was implemented in 2002. Research and development (R&D) tax relief was originally introduced in 2000. With the goal of helping companies that work on and invest in new initiatives in science and technology. For the sake of convenience, this paper shall refer to both methods as R&D.
Through tax reduction against eligible expenditure, R&D tax relief aims to promote investment in innovation and economic development in general. R&D is still a popular issue, however, and HMRC now takes a “deny first. Discuss later” stance when handling claims related to R&D.
Growing the number of claims
R&D claims have increased significantly, according to HMRC, which reports that between 2015–16 and 2020–21. The most recent year for which they have full data—the number of claims more than doubled.
While more claims does not always mean a problem, HMRC has seen a rise in “abuse and boundary-pushing”. When parties submit claims that are not acceptable on behalf of customers in an attempt to take advantage. What they believe to be HMRC’s lax oversight.
The answer from HMRC
In order to address perceived areas of risk, HMRC has tightened its R&D claims standards and procedures. This includes introducing the additional information form (AIF) in August 2023 and prohibiting reimbursements to third parties. Claimants must include additional information on the AIF form in order to bolster their claims. Enabling HMRC to more thoroughly evaluate their veracity.
In an effort to address false R&D claims, HMRC has also increased its compliance operations. Targeted inquiries and identification of the greatest perceived risk are key components of HMRC’s claim processing strategy.
Nevertheless, sincere claimants have unintentionally been impacted by this heightened scrutiny. Owing to the increase in cases, HMRC’s current R&D teams are overworked, necessitating the drafting in of personnel from other departments.
As a result, personnel in charge of inquiries have little to no knowledge with R&D tax credits. Consequently, it seems that HMRC has created a set of guidelines and/or scripts that caseworkers should adhere to when handling these kinds of situations. Since several businesses have received correspondence from HMRC that is very identical.
In some instances, we have also seen that HMRC’s Fraud Investigation Service (FIS) has conducted R&D inquiries. This is quite exceptional since it deviates much from the FIS’s typical job, which involves handling difficult cases with great value.
The FIS R&D procedure is very inflexible; there is no way to communicate with a caseworker, just an email address is available for communication, and the FIS makes all of the choices with little to no explanation or communication.
The current strategy used by HMRC
For all the wrong reasons, the approach has been notable; in two open letters. The Chartered Institute of Taxation (CIOT) voiced reservations about HMRC’s strategy. The CIOT’s letters are important since the professional association and HMRC have a positive working relationship. Therefore this was not a hastily made decision.
The CIOT voiced complaints about the incompetent caseworkers, poor communication, and unhelpful attitude of HMRC.
The letter furthermore addressed the incidental consequences of legitimate claims being denied or withheld, as a component of what HMRC considers to be an extraordinarily fruitful endeavor in diminishing mistakes and misuse while deterring non-adherence.
The CIOT’s worries are in line with what the larger sector believes about HMRC’s strategy.
HMRC argued that 50% of all claims filed at the time of writing were deemed to be invalid in its answer to the CIOT, citing the high incidence of claim ineligibility owing to mistake and abuse.
In addressing R&D Tax Relief situations
The way HMRC now feels about inquiries is reflected in its perspective on ineligibility. In addressing R&D situations, we are seeing that important supporting documentation and proof are either disregarded or not included in HMRC’s answers. This can be the result of caseworkers’ inexperience and ignorance in comprehending the material supplied.
The CIOT’s observation on collateral harm is consistent with our own experience, in which HMRC has contested legitimate claims that were first filed with a complete R&D report and all supporting documentation available upon request.
Claimants have sometimes given up because it would take too long and be too expensive to continue pursuing HMRC. The act of even defending an eligible claim by taxpayers results in large professional fees, even in cases when the defense is successful.
Taxpayers have the option to appeal to the tax tribunal if HMRC determines that a claim is invalid after the first appeal and review process. Many firms find this too costly, especially those with very minor R&D claims, since it may amount to tens of thousands of pounds.
But the risk arises when those who are really making claims are pressured to leave, particularly smaller businesses. The expenditures involved and the possibility of an unjust denial may cause them to reevaluate future claims and further investments.
This runs directly counter to the relief’s original intent, which was to promote investment in scientific and technical advancements. It’s possible that innovation may stall and the economy will suffer as a consequence.
Despite the seemingly dire circumstances, our experience indicates that some inquiries may be resolved promptly and without the need for modifications.
What comes next?
Once HMRC reaches specific, secret internal objectives and compliance activity returns to normal, we think the volume compliance approach will diminish. In the next 18 months, we anticipate a decline in compliance activities due to the AIF filing requirement.
As a result, compliance personnel will be able to give each claim more time, produce reviews of greater quality, and provide judgments on claims that are more accurate.
More seasoned caseworkers will enable HMRC to lessen both the amount of R&D fraud and the amount of valid applications that are turned down.
Posing a claim for R&D Tax Relief? Rejected claim?
Getting expert guidance is essential whether you are considering a claim or have already filed and received inquiry from HMRC. A knowledgeable professional adviser can advise you on the likelihood of claim’s success and make sure you follow rules. Taking the correct guidance is more critical than ever in light of the increasing scrutiny from HMRC.
🔍 Facing HMRC scrutiny over R&D tax relief claims? Get expert insights on navigating investigations effectively! 💼 Learn how to avoid pitfalls, understand eligibility criteria, and ensure your claim’s success amidst tightening standards. 💡 #HMRC #RDtaxrelief #BusinessAdvisory
FAQS
Q1.Why has HMRC increased scrutiny on R&D tax relief claims?
HMRC noticed a surge in claims and instances of abuse, prompting tighter standards to ensure validity and prevent misuse.
Q2.What are the common challenges faced by businesses during HMRC investigations?
Inexperienced caseworkers, poor communication, and an inflexible approach from the Fraud Investigation Service (FIS) pose challenges. Legitimate claims may be wrongly denied, incurring costs for businesses.
Q3.How can businesses ensure successful R&D claims amidst HMRC scrutiny?
Seek expert advice for eligibility criteria, documentation, and navigating investigations efficiently. Expert guidance is crucial given the increased scrutiny and risks of rejected claims.
