What can trigger an HMRC R&D tax credit investigation and what happens next?
If HMRC contacts an individual to say they’re launching an enquiry regarding their R&D business activities, everything can feel pretty scary very quickly. But with timely support from the right firm - and plenty of care taken in putting together a claim - it’s likely to be no great cause for concern.
What is an HMRC enquiry?
The UK government launched its R&D tax credit scheme in the year 2000 as an incentive for businesses to invest in development and innovation. Over the years it has helped to boost the UK economy whilst rewarding companies with credits to reduce their Corporation Tax liabilities. HMRC administers and manages these R&D tax credit incentives, and sometimes this can lead to an enquiry.
HMRC usually processes R&D tax credit claims very swiftly and they aim to work to a deadline of 28 days. In the vast majority of cases, it’s simply a paper exercise where an application is reviewed, submitted documents checked, and the R&D tax credit claim processed. Sometimes, however, HMRC makes a request for further information to answer any questions or clear up any issues. This is what’s referred to as an enquiry.
What can make HMRC open an enquiry?
Each year, HMRC will open enquiries on a certain percentage of R&D tax credit claims as a matter of course. It makes up part of a review process to check that it’s behaving fairly, and properly distributing the money available for R&D tax incentives.
The reasoning behind HMRC opening a tax enquiry can vary. It could be for something related to the business itself, like a change of Director or a sudden reduction in profit for instance. They may also have some questions about the work a company carries out, or about the technology or software it uses.
What are the common reasons for an R&D tax credit claim to be investigated by HMRC?
As mentioned, reasons for an enquiry can be many and varied but the most common ones we’ve come across are:
- HMRC is carrying out a fact-finding exercise, likely because of a larger claim value having been submitted compared to ones put forward previously.
- HMRC is looking to focus on a certain sector or type of technology to make sure all claims are consistent.
- HMRC believes there’s an inconsistency and wants to check the credibility of a claim.
- HMRC has a question about a company’s tax return. Although this isn’t directly to do with an R&D claim, it’s looked at all together for completeness.
This is what makes it so important that a company’s R&D tax credit claim is as accurate and thorough as it possibly can be. At Myriad Associates we’re experts in this field and will help clients every step of the way to make sure they get it right first time.
How can HMRC enquiries be avoided?
When it comes to submitting an R&D tax credit claim, attention to detail and due diligence are essential. It’s vital that business owners can demonstrate a clear understanding of the guidelines in regard to R&D and have checked that their technical narrative supports this. Record-keeping measures should also be watertight as this will not only help to avoid problems now but in the future as well.
Claims that have been properly and carefully presented are far more likely to stand up to HMRC scrutiny - and indeed to then be paid. A robust narrative and strong methodology is the most effective way to reduce the likelihood of any penalties or deductions being imposed too.
What are these penalties?
HMRC is within its rights to disallow up to 100% of an R&D tax credit claim value if it thinks a company is claiming dishonestly or it has deemed that the preparation process is negligent. As we all know from the media, government funding is tight and protecting the public purse is of paramount importance. Helpful co-operation and a positive attitude will also help put clients in a good light when it comes to deciding exactly what penalties to apply.
What to do if faced with an enquiry
At Myriad Associates, we've not had one client denied thier R&D tax credit by HMRC and it’s something we’re very proud of. Thanks to the combined knowledge of our expert team, there’s very little we haven’t seen before so by working with us, the chances of a client being investigated are very low.
However, the first thing we encourage clients to do if they have received notification of an enquiry is to stay calm and pick up the phone. As an experienced team of aR&D tax advisors we feel it’s important to offer reassurance, answer any questions and explain the enquiries process further.
The initial stage of an enquiry will be a request from HMRC for additional information about an applicant’s R&D tax credit claim. Accountants should help clients collect this information and liaise with HMRC on their behalf. An offer should also be made to work with the relevant members of the company’s finance team if any additional issues need to be clarified. Throughout the enquiry process we always encourage clients to take a diplomatic, professional and positive approach towards HMRC as their attitude can make a big difference to the eventual outcome.
Once the required information has been put together, accountants should help the client to formulate a response to the enquiry in writing. Often this is enough to resolve the issue, with HMRC being satisfied that the original application is correct. This is the outcome we all hope for, with the enquiry being closed and the tax credit payment arranged.
But what if the enquiry continues?
Again, make sure the client doesn’t panic. HMRC will write to them to explain the next steps and what they will need to do. Usually this will involve a telephone call and/or a meeting with their HMRC representative in person. But just because further investigations have been requested, it doesn’t mean they’re necessarily in trouble. Often it means that HMRC believe they should have the option of a negotiated settlement or, following further questioning, a number of discussions and meetings need to be scheduled until a resolution can be found.
We cannot emphasize this enough though – clients must not worry, or try to do everything themselves. Accountancy firms should be the hand that guides them and who will work hard to make sure an outcome is reached that suits everyone and resolves the enquiry.
Whatever the situation, Myriad Associates are ready to offer help and advice about all aspects of R&D tax credit claims as required. Contact us today on 0207 118 6045 or use our contact page and one of our experienced consultants will be pleased to assist.