R&D discovery assessment – your questions answered 

Recent high-profile investigations into R&D agents suspected of submitting fraudulent claims, and providing erroneous advice to clients, may have left some businesses feeling concerned about claims submitted on their behalf.

If you have concerns about a current or previous R&D tax relief claim submitted on your behalf though, don’t panic. While a minority of bad actors will have deliberately set out to defraud, most businesses who find themselves in this position are likely to be recipients of poor advice, or simply have made mistakes in calculating their R&D expenditure through a lack of understanding.

Neither scenario sees businesses escape responsibility and penalties for carelessness can be imposed. But there is nothing to be gained by burying your head in the sand. Taking a proactive approach to reviewing past periods and making any necessary disclosures to HMRC can go some way to mitigating negative consequences.

Whatever the circumstance, in cases where HMRC uses its discovery powers, businesses should always seek expert help.

What is an HMRC discovery assessment?

A “discovery assessment” is the mechanism available to HMRC to recover tax owed in certain circumstances. Namely, where businesses:

• understate their profit,
• overstate their losses, or
• overstate a claim.

As a result, they pay less tax or receive a greater tax credit than that to which they are entitled.

The Corporation Tax discovery legislation is set out in paragraphs 41 to 46 of Schedule 18 of the Finance Act 1998 and has been heavily litigated, including its Income Tax equivalent. It prescribes a limit of four years from the end of the accounting period for a simple error, six years for carelessness and 20 years for deliberate behaviour (formerly fraud or willful neglect).

A discovery assessment can only be made if an HMRC Officer discovers that something hasn’t been assessed, an assessment is insufficient, or relief has been given but is now excessive.

If HMRC considers that one of those criteria has been met, it should notify the business in correspondence that it considers there to be a discovery position. In certain instances, such as when a time limit is about to expire, it may issue a discovery assessment first.

When can HMRC make a discovery assessment into an R&D claim?

An HMRC discovery assessment is applicable in relation to a range of taxation and is not exclusively reserved for R&D tax credit claims. In the R&D tax relief context, a discovery assessment is most likely to arise when a business is under enquiry and HMRC is already enquiring into its R&D claim.

As HMRC begins to investigate particular agents though, it may make a discovery that affects one or many of that agent’s clients. The legislation includes the carelessness or deliberate behaviour of the company, as well as a “related person” – defined as “a person acting on behalf of the company.” This can include an agent. Should such a person be identified, then a discovery assessment could be triggered.

Can you challenge a discovery assessment?

In short: yes, you can. HMRC’s power to issue a discovery assessment is subject to a number of important limitations.

First, you should not agree carelessness or deliberate behaviour without expert advice. It is a question of judgment and you don’t simply have to rely on HMRC’s view.

Second, there is the question of what HMRC already knew. HMRC can only “discover” an issue if it couldn’t have been aware of the relevant facts at the time when it could have opened an enquiry. With an R&D claim, for example, a lot of information will often be disclosed to HMRC with the claim itself, which may serve as a form of protection.

Third, it’s worth bearing in mind that HMRC can’t raise a discovery assessment where the original filing by the taxpayer was made in line with the prevailing practice at the time. This defence was successfully argued in a recent R&D Tax Tribunal case: Stage One Creative Services Ltd v HMRC [2024] UKFTT 1059 (TC).

How do I challenge a discovery assessment?

Normal appeal procedures apply, meaning that if you receive notice of a discovery assessment, you will have 30 days to appeal. If, for whatever reason, that time limit has been substantially shortened due to a delay, read the assessment and the advice on how to appeal. Submit an appeal in line with that advice, with the grounds of appeal being “not in accordance with information provided to HMRC – more detail to be provided in due course” stating that further contact will be made after taking advice from a reputable R&D adviser.

This is encouraged, since it can be difficult to challenge that a discovery has been made. If you have a full 30 days to appeal, you will have time to speak with a reputable adviser first. We strongly advise that you do this for an early consideration of whether or not you should appeal.

The appeal can be withdrawn if the adviser recommends this course of action or can provide more detailed grounds of appeal so that discussion can begin with HMRC on areas of disagreement. The burden of proof is on HMRC to demonstrate the discovery made, as well as the amount that the business owes.

What is HMRC looking for in a discovery assessment?

HMRC is looking to establish the following:

1. That they have discovered something;
2. The amount of tax involved; and
3. Whether there is “careless” or “deliberate” behaviour.

All of the above requires expert analysis of the fact pattern involved. “Careless” is failing to take reasonable care, or to do something that a reasonable person of the same knowledge and ability would not do. “Deliberate” is knowingly doing something that should not be done.

Either type of behaviour could be done by a “related person”, as above. “Acting on behalf of” is likely to include an agent, but simply advising (as some R&D firms do) may not be included. Submitting the CT600 form is one example of “acting on behalf of”.

What penalties can be applied following a discovery assessment?

A finding of at least carelessness is required to assess a penalty, but a penalty does not apply to the carelessness of an agent. So, it is possible to have a situation where discovery assessments are made for six years because the agent has been careless, but no penalties would be due if the company itself has not been careless. If, however, HMRC finds that the company has been careless in any of those six years, then penalties will become due in respect of the relevant years. Interest – purely commercial and not penal – would also be due.

Careless penalties can be suspended if agreement can be reached on suspension conditions to be fulfilled. The maximum careless penalty is 30% of the PLR (Potential Lost Revenue), which is the Corporation Tax underassessed, the tax credit overclaimed, or 10% of the amount losses incorrectly increased by the claim, or a combination of all three; the minimum is 0% if the situation is notified without fear of early discovery.

Penalties for deliberate errors are more significant. They can be 100% or 200% if an offshore matter is involved. There is also no suspension of deliberate penalties.

All penalties can be reduced depending on how much the company helps HMRC in its discovery enquiry. It is very important to get expert help from the start to mitigate penalties, which are also subject to the usual appeal procedure.

Making disclosures to HMRC

If you discover any discrepancies or errors yourself, depending on the scenario, you may be able to utilise HMRC’s new R&D voluntary disclosure service. It is available to those who believe that they may have claimed too much R&D tax relief in error but are out of time to amend their company tax return. It is not available to those companies whose behaviour was deliberate.

Although the service is available online, until you have spoken to a reputable agent, you should not make a disclosure – since you may not have anything to disclose. If you have made an unnecessary disclosure without first speaking to an adviser, then it would be hoped that HMRC would ultimately see that you had nothing to disclose. That process may be long and hard though – and exhausting both physically and mentally.

Let an experienced agent such as ForrestBrown share that burden, and offer you common sense, support and reassurance where appropriate.

Looking to the future

It’s important not to repeat previous mistakes. Following your disclosure and/or any discovery assessment, there are steps that you might want to consider to protect yourself in the future. These might include strengthening internal compliance processes; keeping up to speed with the relevant legislation and guidance; and ensuring that the “responsible officer” signing off on the R&D claim is aware of their responsibilities.

A reputable agent such as ForrestBrown will cover all of this for you and ensure that your claims processes are robust going forward.

R&D tax incentives remain a force for good

A small number of rogue agents operate in the R&D tax relief sphere, as they do in others. That HMRC has stepped up its compliance efforts and they are being weeded out is positive and enables the industry to embed best practice and further raise its standards.

R&D tax relief plays a powerful part in supporting innovative businesses to grow, with significant spillover benefits for the wider economy. Let’s not lose sight of that and ensure that the mechanisms are in place to support the small minority that have fallen foul of non-reputable agents acting on their behalf.