We have already blogged about the new measures announced in November 2021, which aim to target abuse of the R&D tax credit system and to improve compliance with the DTI conditions.
HMRC have now appointed an additional 100 R&D tax credit compliance officers to help them tackle the perceived abuse, meaning it is inevitable that the number of tax enquiries will increase significantly. We also know that HMRC take a risk-based approach to choosing which R&D tax credit claims to open for enquiry. Therefore, it is increasingly important to give HMRC detailed information upfront in terms of the expenditure the R&D claim covers, the nature of the advance sought, the precise field of science or technology and which technological uncertainties the developments were seeking to overcome.
We know from speaking to Inspectors of Taxes, however, that some tax enquiries are still chosen at random and so anyone making an R&D tax credit claim should plan for dealing with an HMRC enquiry.
As experienced chartered tax advisors who have dealt with R&D tax credit enquiries for almost 20 years, we understand the processes and potential pitfalls in dealing with these enquiries and, as such, we have five top tips for dealing with them successfully:
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When you receive the HMRC compliance check letter
Before you do anything, please check that it was delivered to you within the tax enquiry window. Generally, HMRC have 12 months following the filing of a corporation tax return to deliver an enquiry notice. Checking the two dates is critical in deciding whether you need to respond or politely refuse!
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Calling the R&D tax credit officer/inspector
Calling HMRC to let them know who you are and that you will be dealing with the tax enquiry is an effective way to start the process. You can ask where they are based and whether they think a meeting would be beneficial. You can also stress that you believe it is a strong R&D claim and let them know which competent professional(s) in the company are going to be answering the technical queries.
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Meeting the tax enquiry deadlines
Co-operation is always key to helping settle the HMRC enquiry successfully. The HMRC officer will also have their own internal targets for closing enquiry cases and so will be keen to keep to deadlines. Problems often occur where the company’s competent professional is too busy leading the R&D process to respond. If you cannot reply in time, always let HMRC know in advance and agree a new date.
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Know what activities are NON-qualifying for R&D
This might sound counterintuitive, but I have used this successfully in several scenarios. By proving to HMRC that you have considered projects and concluded they are routine work that does not qualify as R&D, it is easier to justify what is being claimed as R&D. The same goes for R&D expenditure and staffing cost percentages for qualifying R&D. Being clear on what you have excluded as R&D activities can help to justify what you have claimed.
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Be prepared to negotiate with HMRC
Whilst the intention from the start will be to prevent a reduction in the R&D claim by even a penny, there does need to be room for negotiation. Not every tax enquiry adjustment has to be a downward one. If HMRC refuse to allow a specific aspect as R&D, there could be other areas of the claim that can still be increased. I have seen cases where some individuals’ staffing cost percentages have gone down but others have gone up so that the final R&D claim ends up being agreed at a figure almost identical to the one at which we started!
The next steps
For more information about how to manage HMRC’s R&D tax credit enquiries on your own business, or to discuss your potential for an R&D claim, please contact Kevin Edwards, or your usual UHY adviser.
