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Penalties and repayments are no longer hypothetical

25th Jul 2023
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R&D tax relief training and support

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For a long time, penalties and claim repayments were really uncommon. Advisors warned clients they were possible but few actually occurred. Recently, things have changed - drastically.

Wooden blocks spelling out the word "penalty"

Nowadays, we hear about rejected claims on a weekly basis. They come with demands for repayment and penalties, if applicable. 

HMRC’s primary objective is to safeguard the integrity of the scheme and ensure it rewards legitimate R&D activities. The aim is to maintain the effectiveness and fairness of the scheme.

As part of this compliance work, claims can be rejected, and repayments required, for various reasons, such as:

  • errors or misunderstandings in the initial claim submission,
  • misinterpretation of eligibility criteria,
  • the discovery of inaccuracies during an audit or compliance review.

Now, while the new approach is definitely unsettling, it’s crucial to understand the rationale behind their decision.

How you handle an enquiry can determine how much is paid back.  

Depending on how they’ve assessed your client’s errors, HMRC can apply various levels of penalty. These can then be reduced due to “good behaviour”. 

Example A
A publishing company with a turnover of approx. £2 million had improved its offerings by creating a website to complement one of its magazines. They asked their accountant to prepare the claim.. They claimed successfully and received a payable tax credit of £80,000 for 2022.

However, in February 2023, they received an enquiry regarding the claim. The accountant initially responded on their behalf but HMRC followed up with further questions and queries. 

The accountant then sought help from our Claim Support service. We reviewed the documentation and spoke with the developer, and concluded HMRC was indeed correct and the claims were invalid. We advised the company to confirm this with HMRC, which they did.

Outcome: HMRC did ask for the repayment of £80,000 but didn’t impose a fine on this occasion. 

When it comes to deciding if your client is liable for a penalty, HMRC makes their decision based on whether the client took “reasonable care” when preparing the claim. If they determine the client did, then it’s likely they won’t apply a penalty. 

If they decide your client didn’t take reasonable care, the amount they pay comes down to how you and your client behave in the enquiry process. You can find the breakdown of penalty charges and accompanying behaviour parameters in our Insider’s Guide to R&D Tax Relief Enquiries

It’s extremely handy if you’re actively preparing claims; you can apply this knowledge and avoid rejected claims in the future. If the loss of the claim is unavoidable, there’s a lot of information on how penalties are calculated and on how to reduce them. 

Generally, the best way to avoid or reduce a penalty is to be up-front and cooperative with HMRC about errors in your client’s claim. 

Claims are sometimes rejected on flimsy grounds

In its rush towards a more compliant R&D scheme, HMRC doesn’t always get its decisions right. There are instances where it’s appropriate to argue with their decision, such as when they make incorrect assumptions, factual errors, or logical fallacies.

Example B

A company made a claim of approx. £11,000, stating they had made an advance in the field of manufacturing engineering. 

Aiming to improve the performance and durability of aqueous coatings, compared to the baseline technology of lamination and coatings for labels, their improvements would make coatings more resistant to stressful conditions. The claim was submitted and paid by HMRC. 

However a few months later the company received a standard compliance check letter. There was a back-and-forth exchange and the company provided detailed responses to all of their points. 

Despite the extensive information provided, HMRC refused the claim with seemingly little regard for their own guidelines. They said the company failed to demonstrate an advance in the field of retail sales, which is not a scientific or technological field. However, the company had clearly stated their claim was related to an advance in the field of manufacturing engineering.

HMRC also claimed the knowledge presented in the claim could have been deduced by a competent professional and the technology already existed. These deductions were made based on a Google search conducted two years after the claim was submitted. It appeared HMRC was not measuring the client’s advance from the right technological baseline. 

Outcome: HMRC imposed penalties of 15% of the tax benefit for making a "careless inaccuracy" and the company has since requested a separate review by another HMRC officer. 

The point is that sometimes HMRC won’t appear to be reasonable or demonstrate a sufficient understanding of the technology in the field - or even its own guidance. It’s in cases like this that it might be appropriate to appeal their decision. HMRC changing its mind is quite rare, but it does happen

You have a hand in how an enquiry is concluded

Whether it’s suspending or rescinding a penalty, or opting to accept your client’s arguments, it ultimately comes down to people determining the HMRC’s final position. This is good news because it means there’s always something you can do to reduce the negative impact on your client.

The best place to start is with our free guide How to Handle an R&D Enquiry.