The current state of HMRC R&D tax relief enquiries
For nearly a year, the way HMRC has conducted R&D enquiries has been changing significantly.
This is posing new challenges to R&D advisers and their clients. The repercussions of this new approach have left many small businesses opting not to claim for qualifying work due to the perceived risk, hassle and expense of an enquiry. This shift has led to smaller R&D practitioners reconsidering their involvement in preparing claims.
It’s gotten so bad that some advisors have been exploring alternative revenue streams or even exiting the industry. The Chartered Institute of Tax (CIOT) has also voiced concerns over this situation, urging HMRC to address several issues in their approach. These problems include communication issues, caseworker rejections, and penalties, all of which deter legitimate claims and hinder SMEs' growth.
HMRC won’t talk directly to applicants
One of the fundamental issues arising from HMRC’s new volume-based compliance approach is the way it is communicating. Due to the increased volume of enquiries, communication largely occurs through emails and letters, limiting the opportunity for businesses and advisers to fully explain the intricacies of their R&D activities. Although many advisors request a conversation between HMRC and the client’s Competent Professionals, few of these requests are granted.
If you do manage to arrange a direct conversation, preparation is key. Your priority should be to ensure that the Competent Professional representing your client is thoroughly briefed and rehearsed. They should be comfortable explaining their qualifications, the industry baseline, the technological advancements sought, limitations of baseline technology or knowledge, and the work undertaken to resolve the project’s technological uncertainties. Approach the discussion with the mindset that HMRC is now looking for any possible reason to deny the claim, so it’s essential that the Competent Professional is thoroughly prepared on how to best talk about their activities.
HMRC doesn’t listen to Competent Professionals
Indeed, one of the recurring issues R&D advisers now face is that HMRC often disregards the opinions of your clients’ Competent Professionals. This tends to occur when caseworkers struggle to understand the explanation of R&D, its uncertainties, the advance sought, or the baseline. To avoid this, it's crucial to ensure that your R&D technical reports (and the contents of the Additional Information Form) are written so clearly and concisely that they can be easily understood by a layperson with no prior knowledge of the field.
Imagine yourself in the caseworker's shoes, knowing nothing about your client's industry. Consider how they might interpret the information and attempt to verify it. Could anything you’ve written be misconstrued or easily misunderstood? Making your explanations clear and aligned with HMRC's requirements will make the claim less likely to be pulled out of the pile for further review. When caseworkers can easily understand the nature of the R&D, they’re more likely to value the opinion of the Competent Professional.
Avoiding penalties is still possible
When HMRC applies penalties, it can lead to frustration, particularly if you've cooperated fully and have a technical disagreement regarding the project's definition as R&D. However, it's possible to have penalties dropped by maintaining non-confrontational communication. Respond specifically to the reason given for the penalty and provide a detailed account of the steps your client took to exercise reasonable care and compliance.
This may include confirming that the client read and understood HMRC's guidance and that they sought professional advice when applying it to their R&D activities. Maintaining a professional, collaborative tone can increase the chance of avoiding a penalty.
Where to get help with R&D enquiries
Many R&D advisors have been experiencing acute difficulties with how HMRC is now policing the R&D scheme. While further long-term changes are expected, the most crucial step you can take now is to approach any enquiry with a positive, collaborative attitude and a thoroughly prepared client.
To help you navigate an HMRC enquiry, our enquiry guide helps you to work through it step by step. And if you need extra help, we offer members a Claim Support service that can be used to respond to HMRC’s enquiry letters, review claims before they are submitted, or talk to clients to determine the extent of their eligibility. Our ethos is to provide you with all the training and support you need to excel at preparing R&D claims – and to weather HMRC’s current approach to enquiries. Check out our website to learn more about what we do.
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