Why you shouldn’t treat your R&D enquiry like it’s a tribunal
This week we wanted to share something a little different! Below is an extract from an email sent to a client using our Claim Support service. Read on for a sneak peek at the expert insights we offer our customers.
Company names and details have been changed.
Recently we’ve been working with an advisor who’s supporting their client with an R&D enquiry. One of the key points of discussion is whether the R&D work was subcontracted, which was an issue central to the Quinn (London) Tribunal published in October 2021. They were keen to apply the principles from the Tribunal to the enquiry, to show that they were up to speed on these landmark cases.
In this case, the advisor was focused on the issue of whether the contracts drew a clear link between the payments made to Bloggs Ltd and the R&D that they conducted.
The trouble is tribunals and enquiries are not the same thing! A tribunal is an us-against-them affair, where a judge decides who’s right, the claimant, or HMRC. An enquiry, however, is far more collaborative, because your goal isn’t to ‘win’ – it’s to work with HMRC to agree which parts of your claim are valid. Technical, hair-splitting legal arguments aren’t enough, and may even be counter-productive. Instead, you have to win hearts and minds to persuade the caseworker that your interpretation of the rules and facts is correct.
However, in adopting this Tribunal-led focus, they were in danger of losing the enquiry.
Why you need a different approach to handle an enquiry
The difficulty of trying to use principles from Tribunals in an enquiry defence is that HMRC has repeatedly said that it does not agree with the Quinn (London) result. They haven’t changed their interpretation based on the case, and so this argument isn’t going to help you get the case worker on your side.
We explained to the client, “Enquiries tend to be ‘won’ not on technicalities, but on winning the trust and confidence of the case worker. This involves giving them reassurance in a number of areas where they’ve expressed concern.”
When you’re working through an enquiry, the case worker will always be clear about their concerns and the information they need from you to address these. Focussing on these concerns and offering all the information they need, as clearly and concisely as possible, is the best way to earn their trust and get you a good result.
In the case of our recent client, here are the concerns from HMRC, and the responses we recommended.
1. Subcontracted R&D
“The case worker’s email states that the contracts draw a clear link between the payments to Bloggs Ltd and the R&D activities they conducted. If this is the case, then Bloggs Ltd would only be able to claim R&D tax relief under the RDEC scheme when contracted to perform R&D by a Large Company.
“To address this concern, you would need to explain what activities were paid for, and which were not. It may be the case that the company elected to undertake some R&D that was outside the scope of the contracts, and you would certainly wish to highlight that. Additionally, any R&D that the company chose to do before or after the contract work was complete could also be accepted as qualifying under the SME scheme.”
2. Clients were SMEs, not Large Companies
“The second concern is that Bloggs Ltd’s clients may have been SMEs. If that was the case, then those SMEs would have been able to claim relief on 65% of the payment made to Bloggs Ltd (assuming they were unconnected) and Bloggs Ltd would not have been able to claim at all.
“It should be fairly straight forward to ascertain whether Bloggs Ltd’s clients were Large Companies. If they initially appear to be SMEs, you may wish to look at the shareholdings of each to see whether they are Large Companies based on their Linked and Partner Enterprises, for example.”
3. Industry-level advance
“The third concern is that it’s not clear whether Bloggs Ltd was advancing its own level knowledge, or that of the industry. One way you could attempt to address that concern would be if Bloggs Ltd’s work was in such a specialised area that no other companies (to their knowledge) were undertaking that type of work. In that situation, where the niche is so small that its only inhabitant is Bloggs Ltd, it might be possible to argue successfully that they were advancing their own level of knowledge and the industry’s at the same time.”
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