R&D tax enquiries on the increase & how to minimise your chances of an enquiry
HMRC continue to focus their efforts on tackling the misuse of R&D tax relief. With the growth in R&D tax enquiries and claims in recent years, it is believed that there has been an increase in excessive and even spurious claims.
Covid saw many companies looking at R&D tax relief as a way of getting a cash injection and many R&D ‘specialist’ companies heavily marketed to SMEs during this time. It can be the case that firms and companies position themselves as R&D experts, when they don’t have the in-depth knowledge of the R&D tax legislation that is required.
It is important that a project technically qualifies and that only qualifying costs are claimed but the rules can be open to interpretation by claimants and HMRC. In different industries and across a wide range of claims, there are always unique circumstances to analyse to determine whether the claim would meet the stringent conditions.
It is now more important than ever to ensure that your claim is fully compliant and will stand up to HMRC’s scrutiny in the event of an enquiry.
Changes to R&D tax relief
There have been changes in the approach by HMRC in recent times including:
- PAYE / NIC cap for accounting periods beginning on or after 1 April 2021
Specific guidance in the specialist area of software
Requirement for a CT600 to be filed and more recently a specific CT600 form to complete
With HMRC continuing to ramp up their R&D team to deal with compliance, using advisors for your R&D claims that understand the latest rules and cases that have been investigated is critical.
Submitting an R&D claim is going to be under much greater scrutiny now and in the future as HMRC continue to clamp down on R&D fraud.
Future changes announced following the Autumn Budget 2021 include measures specifically aimed at tackling abuse:
- a new HMRC team focused on tackling abuse of these reliefs
- all claims to the R&D reliefs will have to be made digitally with detail on the qualifying aspects of the project
- each claim will need to be endorsed by a named senior officer of the company
- companies will need to inform HMRC, in advance, that they plan to make a claim
Why might HMRC open an enquiry?
There are many reasons why HMRC open R&D enquiries. These could be any of the following:
- Your documentation isn’t correct
- Change in your circumstances
- The type of work / project you’ve claimed for
- Your claim value has increased dramatically
- Inconsistency in your claim
- HMRC are undertaking a check of your industry
How to minimise your chances of an R&D tax relief enquiry
There is no guaranteed way to avoid an R&D tax relief enquiry, but our tips could minimise your likelihood of having a claim challenged or amended.
1) Get a trusted and qualified advisor
Choosing a quality advisor could drastically reduce the chances of a difficult HMRC enquiry and if you are subject to an enquiry, your advisors should be there to support you through the enquiry, rather than run for the hills. There are many ‘R&D specialists’ that won’t have the experience or qualifications to expertly manage an enquiry, so choose wisely.
As a Chartered Accountancy firm, we have qualified tax advisors and specialists who have dealt with many R&D claims and this specialist knowledge will ensure that your claim is robust and fully detailed, minimising your chances of an enquiry. We have the expertise and experience to deal with any HMRC R&D tax enquiries.
2) Record keeping
Make sure your own record-keeping is up to date and transparent. You need to ensure that your records accurately show the costs associated with your R&D activities, again your advisors should give you specific advice in this area.
3) The right person in-house
Ensure the person in your company heading up the claim with your advisors is the person overseeing the project you’re claiming for. The person that knows the most about the process and the project must be involved to ensure your advisors get everything they need to complete the claim and technical report.
4) Clear methodology & reports
Your advisor should make their methodology clear on your claim so that HMRC inspectors don’t have to come back and query this. Also, your advisors should provide an R&D technical report to demonstrate to HMRC how the guidelines apply to your claim.
Dispelling R&D myths
There are many myths out there that people believe about R&D – here’s just a small selection of them:
HMRC can’t ask me to pay back money from an approved claim – Yes, they can. See the point below about an ‘approved’ claim.
My claim was ‘approved’ – HMRC will undertake an enquiry on claims that have been processed and paid out. Typically, HMRC can open an enquiry up to 12 months after submission of a claim, or up to 15 months if an amended tax return is filed with the claim. But if they find out there are errors or a claim is deliberately incorrect or fraudulent, they can open an enquiry on a claim that is much older.
I’ve minimised my risk by choosing ‘no win, no fee’ type arrangement – Be very wary of these types of deals. It’s still your claim and your risk of a future enquiry and you that would need to defend that claim if an enquiry is opened. The provider will generally not cover interest and penalties if they are deemed to be appropriate so you could still be out of pocket.
It’s my advisor’s problem to defend a claim they’ve made – Your advisors should clearly explain the claim they are making on your behalf, the methodology and the report being produced. Any good advisor should be able to help with questions that arise from an enquiry, but you should ‘own the claim’ and be able to ensure that your advisors are doing their job correctly.
R&D tax enquiries – a summary
With many companies claiming to be R&D specialists and HMRC clamping down on R&D fraud, it’s wise to ensure you have the right advisors for your R&D claims now and in future. It’s also worth ensuring that past R&D claims would stand up to scrutiny if challenged by HMRC.
If you want your R&D claims checked by qualified tax specialists or want help to make future R&D claims, then contact us for help.
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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.