In most areas of tax, HMRC enquiries are – while potentially not a welcome prospect – an expected part of being in business. Under the self-assessment tax system, the onus is on the taxpayer to get their tax calculations right, with HMRC checking in detail a proportion of cases via enquiry.
The same is true for R&D tax relief, where a proportion of R&D claims will be selected for further review by HMRC. So can an enquiry into your R&D claims be avoided? The short answer is no. But there are some good practices you can follow to substantially reduce your chances of selection.
Better than hoping to avoid the process entirely, if you carry out R&D on a regular basis it is good practice to review your approach periodically. This helps to ensure that you remain ready for an enquiry should it happen.
Beware R&D agents who neglect to mention the prospect of an enquiry into your R&D tax credit claim, or make unrealistic promises about being able to avoid them. R&D tax relief is regularly marketed as “risk-free”, alongside deceptive marketing messages “like HMRC- approved methodology” and “100% success rate”. If it feels too good to be true, it very well might be.
So, what’s the truth about HMRC R&D tax credit enquiries?
HMRC is under pressure from the government to better understand errors and fraud in R&D tax relief claims. As such, it has increased the size of its R&D compliance team substantially. With more resources and budget for compliance, and pressure to show they are taking action against boundary-pushing and abuse, HMRC’s approach has understandably become more proactive.
Most enquiries into R&D tax relief claims will be raised as a result of a risk assessment. HMRC’s digital systems continue to improve, so there is some automation of the risk assessment process. But HMRC also changes its areas of focus from time to time, so there is no definitive checklist on how they risk assess R&D claims. There are a few characteristics that are more likely to trigger an enquiry. These will be difficult to control, but worth being aware of when you are considering your claim methodology:
- A high claim value (i.e. significantly higher than average tax savings, or significantly higher than any previous R&D claims). Any enquiry takes up time for HMRC’s team. If there is more tax at stake, logically, that time is more likely to be well spent.
- Claims from sectors with traditionally lower R&D intensity, or where the number of claims received by HMRC increases significantly in a short space of time.
- Companies with complex structures, such as group companies contracting with each other, or where it is difficult to confirm SME status due to overseas investors.
- SMEs in receipt of grants, as this is an area where HMRC regularly sees errors occurring.
While these points would normally be beyond your control, there are certain risks you can avoid by preparing your claim properly. These potential red flags include:
- Providing no or limited supporting information to HMRC alongside your R&D claim. There are some legal requirements when you make a claim (especially if you are amending a tax return to include your R&D claim retrospectively), but it is also good practice to disclose to HMRC details of your R&D activities and an analysis of how you have calculated your R&D expenditure.
- Conversely, lengthy reports containing lots of irrelevant information look unprofessional and might suggest you have something to hide. They also risk confusing the HMRC case worker reviewing your case.
- Inconsistencies in data or errors in calculations might suggest that you have not taken due care in preparing your R&D claim, or that you didn’t fully understand the rules governing the incentive.
- Your wider tax affairs, in particular participation in tax avoidance schemes or ongoing enquiries into other aspects of your tax returns. If you are in a dispute with HMRC over another area of tax, expect them to be joined up when it comes to your R&D claim.
For obvious reasons, HMRC does not publish its risk criteria, and HMRC caseworkers can use their discretion when deciding whether to open an enquiry. Remember, the opening of an enquiry does not itself suggest that HMRC thinks there is something wrong with your R&D claim. HMRC should provide you with an explanation of why your case has been selected for enquiry, but you or your agent might have to ask for this.
Random enquiry selection
In response to criticism from the NAO of its estimate of the scale of error and fraud in R&D tax relief, HMRC initiated a random enquiry selection program. This means that a proportion of enquiries each year will be selected at random, so there truly is no way to absolutely avoid an enquiry into your R&D tax relief claim.
As explained above, thinking ‘How can I avoid an HMRC enquiry?’ is perhaps unhelpful. Instead, focus on putting your business in a strong position should an HMRC enquiry happen.
If your claim (and, critically, your adviser) are enquiry ready, then you are in a good place. Some simple due diligence will go a long way:
- If you work with an adviser, are they a member of a relevant professional body? Anyone can call themselves a tax adviser, but professional tax advisers will be members of a professional body, like the Chartered Institute of Taxation. This will mean not only will they be technically qualified to advise you, they will also be subject to ethical oversight and potentially disciplinary proceedings from an independent body. Unregulated advisers will not, and some push boundaries and create unsound claims.
- Does your R&D tax adviser have industry experience relevant to your business? Alongside sound tax advice, working with an industry experience sector specialist means your adviser will truly understand your work and will be able to get the right level of technical details for your supporting information.
- Do you understand what you are claiming relief for and why? Working with an adviser does not absolve you of responsibility for your tax filings. It is vitally important to be involved in the claim process, and a good adviser will take care to explain the fundamentals of your claim and put you in a position where you can review it with confidence.
- Are you up to date with HMRC’s approach? It isn’t just legislative changes that are relevant to how you approach your R&D claim. HMRC’s working practices, interpretations and areas of focus change more often than the actual law does. Staying ahead of these, or working with an adviser who does, will help to avoid unwelcome surprises or unforeseen challenges.
- Have you shared your risk appetite with your adviser? Make your adviser aware of your appetite for risk and they should guide you through your options. This is unlikely to be as simple as deciding whether or not to make a claim, so make sure you are well informed. Often, the risks to your claim are specific to your business and your R&D. Your adviser should (and, really, must) discuss these with you and proactively manage your risk.
When an R&D tax enquiry gets started, it usually follows a set path. Not always, of course. There are exceptions to every rule.
In the first instance, HMRC is likely to set out in writing a list of questions regarding your claim. These questions might be quite wide ranging, often referred to as “fact-finding”, or could be much more pointed if HMRC is looking at a particular risk it has identified in the risk assessment process.
Either way, contact from HMRC should be taken seriously and it is important to note any deadlines set.
Once you have responded to any opening set of queries, expect to wait a few weeks for a response. If the enquiry continues beyond that point, a strategy for resolution will help to secure the best possible result for you. Your strategy should consider the chances of success, how long it might take to agree your case with HMRC, how much time might be needed from your team and the cost of any additional advice.
Do you have a strategy for your enquiry resolution? If not, ForrestBrown can help.Get in touch
If you take one thing away from this article, it should be a sense of perspective. Enquiries happen and there is no way to be certain you’ll avoid one. If you have confidence in your R&D claim and the process you have followed, an enquiry may even be a welcome opportunity to receive some reassurance from HMRC that all is well.
If you’re already facing an enquiry and are concerned about how to resolve it, ForrestBrown’s enquiry support service is open to all businesses. Speak to us, we may be able to help you