HMRC has increased its scrutiny of R&D claims with the introduction of the Individual and Small Business Compliance (ISBC) team. According to evidence given to the Public Accounts Committee, up to one in every five R&D claims is now subject to scrutiny.
What is an enquiry?
When HMRC asks for more information about an R&D tax claim, this process is known as an enquiry, and there are several possible outcomes. If discrepancies are found, your claim could be reduced and even have penalties imposed. Enquiries may highlight better record-keeping requirements for future claims.
While it is possible for any company to be subject to an enquiry, there are some factors which do affect the risk.
SIC codes
Certain Standard Industry Classification (SIC) codes have been identified by HMRC as higher risk. If your company has one of these SIC codes then there is a significantly higher chance that you will get an enquiry. ForrestBrown can advise you on whether your SIC code is likely to be viewed as high risk.
What are the short-term implications of an enquiry?
In the short-term, an enquiry means that payment of the R&D tax credit and/or tax repayment is likely to be delayed – although enquiries can sometimes happen after a claim has been processed. This will give HMRC time to ask questions to better understand the R&D and how the costs claimed have been arrived at. These questions will initially be asked by letter or email.
At ForrestBrown, our enquiry support team can assist you through this process, whether or not we have prepared the claim for you in the first place. It is likely that we’ll need to work with you to gather some additional information, and HMRC may want to speak to you since you are best placed to describe your R&D projects to them. We will be on hand to guide you through the whole process.
Record-keeping
HMRC has published guidance for claimants, GfC3, which responds to calls for examples that clearly illustrate key R&D tax relief concepts.
The introduction in 2023 of a mandatory Additional Information Form to be submitted in advance of all claims nudged businesses toward contemporaneous record-keeping. GfC3 reinforces this. While R&D can be identified retrospectively, GfC3 encourages businesses to identify R&D projects during planning to gather detailed information to identify qualifying activities and costs.
At ForrestBrown, we can work with your business to implement a process where records are captured in real time, which could be presented to HMRC under enquiry. We cannot emphasise enough how important it is to have some form of records in place, to demonstrate R&D that has been carried out. This really does help if a claim goes into enquiry.
How an HMRC enquiry set our client up for the future
“We learned a lot from the enquiry and can now go on to make future R&D tax credit claims with renewed confidence. ForrestBrown knows our business in-depth, and we’ve secured buy-in from our technical staff who are now keeping even better records in anticipation of our next claim.”
What to expect during the enquiry process
The first stage of an enquiry typically involves HMRC sending a letter with some generic questions around the R&D projects and costs included in the R&D claim.
Following the first response there are likely to be a further few rounds of correspondence with HMRC before a decision is reached.
R&D claim accepted
If HMRC accepts the claim in full, it will simply close the enquiry and arrange for the R&D tax credit and/or repayment to be paid.
There may also be a partial acceptance. For example, there may be some projects that are accepted as being R&D, and some projects that are rejected. In this case, the value of the claim would be reduced.
R&D claim rejected
If HMRC do not accept the R&D claim, then they will issue a letter closing the enquiry, and showing how much money the company needs to repay, plus any interest due. It will also consider whether to impose any penalties for carelessness, although this is rare.
At this stage, it is possible to appeal HMRC’s decision, and there are several avenues to do this. At ForrestBrown, we can talk you through the different options available, and help guide you through this.
ForrestBrown – the best team for you
At ForrestBrown our team includes not just chartered tax advisers, sector specialists, chartered accountants and lawyers, but also former HMRC inspectors. We will work with you to ensure the right information is included in your claim and that it properly describes your R&D.
If you’re facing an HMRC enquiry, ForrestBrown can help. Our R&D tax enquiry support service saves you time, and protects your relationship with HMRC. Not facing an enquiry but want to find out more about R&D tax credit enquiries and the reasons behind them – follow the link.