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The changing tides of HMRC compliance checks

5th Jul 2024
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R&D tax relief training and support

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Dealing with HMRC compliance checks has been a rocky ride over the past couple of years, but what recent developments do advisors and their clients need to be aware of?

Changing tides
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As HMRC continues its volume-based approach to R&D tax relief compliance, many advisors are now familiar with their post-enquiry behavioural questions.

HMRC asks these questions directly of the taxpayer, and they’re used during the assessment for penalties. Usually limited to a set of five or six questions, HMRC is attempting to determine:

  • Why the claimant company thought it qualified for R&D tax relief
  • The steps taken to verify that the work adhered to the DSIT guidelines,
  • Whether or not the claimant company had full visibility of supporting documentation before submitting the claim.

Essentially, HMRC is trying to suss out if the claimant did everything they could to ensure compliance with the guidelines before submitting the claim.

Recently, we’ve seen evidence that these questions have been more interrogative. HMRC is now pressing claimants to clarify whether it was themselves that realised they were undertaking qualifying R&D, or whether they were prompted to make a claim by a third-party (by an advisor, for example).

While there’s no rules against a third-party providing advice, only a qualified competent professional can assess whether an advance in science or technology was sought or achieved. The intent behind HMRC’s questions seems to be to determine whether that assessment was made by the company based on the scheme’s guidelines, or on advice given by the third-party.

What do you need to know to prepare for these new behavioural questions?

HMRC Guidance and Claim Responsibility

HMRC’s expectations of the claimant company and any advisor supporting them are clearly defined in the Guidelines for Compliance 3, published in October 2024. The company’s competent professional is responsible for determining that R&D has taken place and providing evidence to support why the project meets the scheme’s criteria.

The advisor, however, can readily assist with defining the scope of the R&D project and the qualifying costs. 

But, how do we know that these behavioural questions are aimed specifically at clarifying the roles and actions of those involved in the claim?

You can look to HMRC’s recent consultation. Driven by their focus on reduction of fraud and error associated with tax relief claims, HMRC laid out their proposals to raise standards within the tax advice industry. They’re looking to strengthen the regulatory framework and improve registration of tax advisors. These questions are in-line with that goal, placing more scrutiny on the role of the advisor and the quality of their advice during the claim submission process.

The expanded set of behavioural questions continues to test the sharing of knowledge between the claimant and the advisor. Was the client uninformed, mis-informed, or well-informed? Questions include:

  • Was the company aware of what categories of costs qualify and how the R&D Tax Relief is calculated?
  • Has the company access to anyone that has made an R&D claim in the past?
  • What evidence and records were used to compile the claim?

HMRC is looking for clarity that the submission was based on more than a fair and reasonable estimation of costs. You’ll need to provide evidence that the company performed a critical review of its project activities and supporting documentation before compiling the claim. Any penalty your client might face is based on the answers to these questions.

Are penalties always issued during enquiries?

Unfortunately, HMRC seems to have become quick to issue penalties – sometimes doing so even before the enquiry has been concluded. But responding promptly, and providing clear and concise information that directly answers all of their questions, can minimise the risk of your client receiving a penalty for an inaccurate claim. 

Still, it’s clear that the spotlight is still on ensuring that both claimants and advisors recognise their responsibilities in submitting compliant claims. This is a major theme throughout the course of an enquiry, not just with these behavioural questions. You can find the latest information about dealing with HMRC enquiries in our recently updated Enquiry Guide.

Download Enquiry Guide