If HMRC identify an error in a research and development (R&D) tax credit claim, they may charge a penalty based on the tax loss to the Exchequer. The severity of the penalty will depend on whether due care and attention is determined to have been given to the claim’s preparation. If reasonable care has been taken, a penalty of ‘nil’ may be applied.
The size of R&D tax credit penalties
The severity of an HMRC penalty will depend on the circumstances surrounding your R&D tax credit claim. If it is found that an error was deliberately made or intentionally hidden, the penalty can be as much as 100% of the tax lost. But, if you are responsive and forthcoming with information when an error is identified, the penalty can be reduced to reflect this co-operation.
If an error is found in an R&D tax credit claim, but it can still be shown that reasonable care has been taken in the claim’s preparation, HMRC may choose to apply a penalty of ‘nil’. There are also abatements and reductions for good behaviour in addressing any errors, i.e. your sincerity and responsiveness if any errors are found.
A penalty can also be suspended while a company attempts to address the reason for the error. It may, for example, be asked to improve its record-keeping, with a date set for review.
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.
If any issues are raised by HMRC it is a good idea to have a meeting to discuss them. It is likely that a more positive outcome will be reached by being open and responsive. HMRC do not want to withhold R&D tax credits or discourage claiming; the penalty measure only exists to ensure proper care and attention is taken when claims are prepared.
At ForrestBrown our team includes not just chartered tax advisers but former HMRC inspectors and a seat on HMRC’s R&D consultative committee. We will work with you to create a robust a claim methodology, giving you peace of mind that your R&D tax credit claim is correct and stands up to HMRC scrutiny. Our enquiry rate is less than 2% – and no enquiry has ever resulted in a claim by us being rejected.