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4 Tips for Avoiding HMRC Enquiries

23rd Nov 2023
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R&D tax relief training and support

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Since the start of the year, HMRC has turned a much more discerning eye towards the R&D tax relief scheme.

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Part of these changes involve it tightening up on which activities are deemed to qualify for relief and increasing the requirements for evidence and documentation. Unfortunately, HMRC has not widely publicised these changes, and some tax advisers have found it difficult to know how to adapt their processes.

With enquiries and penalties issued at higher rates than ever before, how can advisers minimise the risk of attracting HMRC’s attention? The most effective strategy is often prevention, as compliance checks are often triggered by issues within the claims themselves. Here are some of the most common pitfalls to avoid in your R&D claim process.

Overly Long Reports

One common problem is submitting reports that exceed the typical 30-minute review timeframe for HMRC case workers. Anecdotal evidence suggests that lengthy reports are more likely to be flagged as high-risk, because they can’t be fully assessed in the limited time available. To mitigate this risk, keep reports clear, concise, and focused on essential facts. Avoid unnecessary details that could make the project appear convoluted and, as a result, harder for HMRC to assess. Rather than adding extra information to impress, prioritise clarity and brevity in your report.

‘Red Flag’ Words and Exaggerated Language

Your choice of words can significantly impact the outcome of an R&D claim. Certain terms, such as "bespoke," "custom," and "unique," might imply specificity to a client without providing clarity on the technological advancement achieved. It is advisable to steer clear of these terms to prevent potential misunderstandings with HMRC. Additionally, avoid using exaggerated language to describe technological advances, as it can undermine the credibility of the claim. Instead, opt for neutral, balanced and precise language that accurately communicates the nature of the advance without resorting to hyperbole.

No ‘Competent Professionals’

A critical aspect of preparing a robust R&D claim is ensuring the involvement of Competent Professionals in the relevant area of technology. While it is not mandatory for a company to employ Competent Professionals (and could use a skilled subcontractor, for example), doing so enhances the claim's credibility. These people bring expertise to the project, and their involvement signals to HMRC that the claim is based on informed assessments of the baseline, advance and uncertainties. Consider where Competent Professionals are employed and how many are involved in the project, as these factors can influence HMRC’s perceived risk of the claim.

Unrealistic, Overstated, or Inaccurate Staff Apportionments

Staff apportionments play a pivotal role in determining the eligible costs for an R&D claim. One common mistake is the use of 100% apportionments, particularly for directors. Even in small and medium-sized enterprises (SMEs) exclusively engaged in R&D projects, staff are very likely to be involved in non-qualifying activities too. To enhance the credibility of your claim, exercise caution with staff apportionments and avoid blanket percentages across the entire team. Instead, opt for individual and detailed apportionments, including job titles, to provide HMRC with a transparent view of the staff costs included in the claim.

Careful attention to detail and a proactive approach to combat these issues can significantly reduce the risks associated with R&D claims. To further support this effort, download our free Red Flag Checklist, which provides a comprehensive guide to minimizing risks in your R&D claims. You can also share this checklist with your team to raise awareness of HMRC's criteria for selecting R&D claims for enquiry and help prevent the most common mistakes during claim preparation.

By adopting these strategies, you can enhance the efficiency of the R&D claim process and increase the likelihood of a successful outcome while minimizing the risk of an HMRC enquiry.

R&D Red Flag Checklist