If HMRC identify an error in an R&D tax claim, or if they are voluntarily made aware of an error, they are obliged by law to consider a penalty. Whether a penalty is due depends on how it came about. HMRC will ask questions about the behaviour of the company leading up to the making of the error.
Types of behaviours to determine if a penalty will be charged
There are three types of behaviour relevant to whether or not a penalty will be charged:
- Mistake despite taking reasonable care (MDTRC),
- Careless behaviour, or
- Deliberate behaviour (which is further sub-divided into whether or not the inaccuracy was ‘concealed’).
Further behaviours are relevant when considering the quantum of the assessment.
Mistake despite taking reasonable care
As long as a company took ‘reasonable’ care in making the claim there should be no penalty. ‘Reasonable’ has been debated extensively over the years. The yardstick is generally based on what a reasonable person in the same position as the company would do. It should be possible to establish that reasonable care was taken as long as a company:
- performs a reasonable degree of due diligence to ensure an agent’s suitability in the relevant field of advice,
- provides that agent with all information requested,
- follows the advice of the agent,
- checks the work of the agent to the extent of their abilities.
Careless behaviour
This occurs where the claimant fails to take reasonable care. This extends to relying on an agent where one or more of the actions above has not been followed. For example, seeing an advert or receiving a telephone call from an agent who claims to be an expert in R&D and then letting them submit a claim for you with no further consideration of them is not taking reasonable care. Work should be done to research the agent, check for qualifications, test the agent’s claims and if there is any doubt at all, seek a second opinion. Most companies will have an accountant acting for them, so it is easy to ask them for their opinion on the R&D agent’s claims.
It is important to note here that if a mistake is made in a return and some time later the company discovers that mistake, then a company could be found to be careless for delaying informing HMRC of the inaccuracy even if the behaviour leading to the inaccuracy was not a matter of carelessness.
Deliberate behaviour
This is behaviour which is intentionally used to mislead HMRC. Anyone falling into this category may be subject to penalties or criminal investigation. Advice should be sought immediately if you fall into this category of behaviour.
Find out more about R&D tax error and non-compliance.
How penalties are calculated
A penalty is calculated as a percentage of the ‘potential lost revenue’ (PLR). This is the difference between the correct amount of tax due and the incorrect amount in the return arising from the inaccuracy. This includes Corporation Tax and any tax credit, or combination of the two. In the event there are unused losses that were reduced, then the PLR is 10% of the difference, or 0% if there is no realistic prospect of the losses ever being used.
The size of R&D tax credit penalties
For cases involving MDTRC there is no penalty. For the avoidance of doubt, this means no penalty can be charged, not even a ‘nil’ penalty, because there is no culpability.
In ‘careless’ cases the maximum penalty is 30% of the PLR. For deliberate ‘unconcealed’ the maximum is 70%, and for ‘concealed’ it is 100%.
The above are maximum penalties, and the size of them can be reduced depending on behaviours during an enquiry into the relevant return. Matters such as the timing of the disclosure, the extent of the disclosure and help given during any enquiry are all areas that can reduce any penalty to be charged, sometimes to 0% in respect of a case of carelessness.
Suspension
Careless (but not deliberate) penalties can, in certain circumstances, be suspended. Providing conditions can be set to prevent a recurrence of the inaccuracy (which must be specific, measurable, achievable, realistic and timebound), and that the company remains on top of its tax obligations during the suspension period, then a penalty ought to be suspended.
How to avoid penalties on R&D tax credit claims
Bearing in mind the penalty cost and the amount of time involved in dealing with an enquiry, it pays to demonstrate to HMRC that you have taken due care and attention in preparing your claim. The main way you can show this is to prepare a robust claim with a sound methodology by involving a reputable agent.
At ForrestBrown, our team includes a former HMRC inspector alongside chartered tax advisers. We will work with you to create a robust claim methodology, giving you peace of mind that your R&D tax credit claim is correct and stands up to HMRC scrutiny.
Appeals
As with most matters involving HMRC, decisions made by HMRC about behaviour alleged, the amount of a penalty and if it is not suspended can be appealed. Strict time limits apply once a case gets to this stage, and you should contact a reputable agent at the earliest opportunity to discuss whether or not to appeal, and the chances of success.
Find out more about ForrestBrown’s advisory service.