More than 15,000 R&D tax credit claims were submitted to HMRC across the UK last year, and each year a number of those claims are likely to result in some form of ‘investigation’ or ‘enquiry’ by HMRC. This post considers some of the common reasons that HMRC may request an audit of your R&D activities and the process they will likely follow to achieve a resolution.

What should I expect?

The vast majority of correctly prepared R&D claims are processed by HMRC once received and a repayment is issued or the tax credit applied. This is the route that most of the R&D claims submitted annually will follow. You may receive notification that any repayment will need to be offset against any outstanding liabilities, but the first you will likely know that your claim has been successful will be the receipt of a payment from HMRC into your bank account.

What could happen?

There are a number of instances where HMRC may request further clarification from a claimant prior to approving the claim, and if this happens this is nothing to be concerned about.

HMRC may have some further questions

The most likely scenario is that there are some costs within the claim that they require clarification on, or that there is an element of the claim on which they would like further information regarding the methodology applied to calculate the allowable expenditure. These questions can sometimes be dealt with by email, but often a phone call can prove more time efficient.  A significant part of HMRCs’ R&D Unit remit is ‘helping companies to prepare accurate claims to R&D relief, and on achieving a balanced focus on non-compliance’ and so will often advise on how they would prefer to see claims submitted in future. If an error has been identified they may choose to allow the expenditure in this instance, provided measures are put in place in future to ensure the mistake doesn’t happen again.

Provided HMRC are satisfied by the responses provided the payment or tax credit will be issued in the usual manner.

What if HMRC are not satisfied?

If HMRC are not satisfied by the responses provided or seek further clarification they may choose to open a formal enquiry. This typically happens within 30 days of receiving the claim, but can take longer if, for example, HMRC choose to open a wider enquiry into your tax return within the statutory time limit.  Payable tax credits are typically withheld during the enquiry process until HMRC are satisfied that all or part of the claim can be processed. If HMRC issue an enquiry they will typically request a meeting at the claimants business premise.

Why do enquiries happen?

HMRC can launch an enquiry for a huge number of reasons. They may for example seek clarification that the claim has been prepared in accordance with the BIS guidelines. If a company has not claimed previously they may just need to satisfy themselves that the activities undertaken qualify for relief. They may ask to meet with the individuals responsible carrying out the R&D activity, to ensure they satisfy the criteria of being a ‘competent professional in the field’.  It’s not uncommon for HMRC to enquire as to a claimant’s familiarity with the BIS Guidelines, to ensure they can identify ‘an overall advance in science or technology’. It is critical that advisers guide their clients through these in detail to ensure that all parties have taken reasonable care when preparing the claim documentation.

HMRC’s view on some of the specific costs that can qualify for relief is not necessarily set in stone, and it’s not unusual for there to be differences in viewpoint over specific elements of qualifying expenditure. The R&D Unit dealing with your claim may just be seeking to clarify how they would prefer to see certain costs treated. It may even be the case that the R&D Unit haven’t dealt with an R&D claim from the adviser submitting the claim in the past, and wish to satisfy themselves that the claimant has been well advised, following a recognised methodology to calculate the allowable costs.  Incorrect treatment of grant income can often lead to enquiries as improper treatment can sometimes put the entire claim at risk.

In instances of complex group structures where cross-charging has taken place they may seek clarification on the nature of these payments between group businesses. HMRC may even seek clarification on the contractual arrangements related to subcontracted development costs. This list is far from exhaustive but the specific nature of the enquiry will typically be laid out in a letter from HMRC.

Preparing for the meeting

The meeting with HMRC is certainly not going to be confrontational in nature, the HMRC Inspector will instead seek clarification on certain specific points, which are often disclosed in advance. Whilst the meeting is not intended to be intimidating it is not to be taken lightly. HMRC will expect you to prepare any information that has been requested in advance, and you should familiarise yourself with the claim documentation prior to the meeting. If preparing for this meeting is the first time you’ve read a copy of the BIS guidelines then this is probably the time to start getting concerned. The HMRC Inspector will expect both those preparing the claim documentation, as well as those responsible for assisting with the preparation of the reports to have a clear understanding of the guidelines, and will need to be satisfied that the claim has been compiled in accordance with them.

A good R&D specialist will support you through this process, and work with you to prepare for the meeting, talking you through the sort of questions HMRC may ask. All eventualities should be prepared for and the often-relaxed nature of these meetings should not be confused with one where you don’t need to prepare, questions should be taken seriously and you should ensure you offer full and accurate responses to questions posed.

The enquiry process could potentially appear somewhat laborious to someone unfamiliar with negotiations with HMRC, but there is a clear process that needs to be followed. Take advice from your adviser who will likely understand how the HMRC Inspector dealing with the enquiry likes to have information presented. Working with the Inspector to satisfy their concerns will undoubtedly lead to a quicker resolution. Your adviser is there to support you, but typically the HMRC Inspector will look to the claimant for answers to their questions. These meetings can sometimes go on for some time and you should likely clear your diary for the rest of the day.

What could go wrong?

Most enquiries result in HMRC closing the enquiry and issuing a payment or tax credit for the claim value or a mutually agreed value. If this is the case it may be necessary to submit a revised claim submission. It’s only in rare instances where HMRC identify unacceptable behavior that they will choose to reject the R&D tax credit application.  In yet fewer instances HMRC may potentially choose to impose penalties, however fortunately neither of these instances are things we have ever come across, after handling hundreds of successful R&D claims. There is likely to be a renewed focus on penalties where HMRC identify persistent errors within claim documentation, but provided ‘reasonable care’ has been taken by the adviser and the claimant this will not always necessarily result in a penalty.

There are other circumstances where repayments could be delayed for sustained periods of time, such as, if claimants are involved in schemes that exist for the purposes of tax avoidance, particularly if those schemes are subject to litigation by HMRC.

In conclusion

The enquiry process can appear outwardly daunting, but provided your claim has been properly prepared it is really nothing to be concerned about. A good R&D specialist will hold your hand throughout the process, and communicate with you the next steps towards a successful resolution.  It’s often enquiry situations where contingent fee structures can be most beneficial, as an adviser working on a fixed fee where enquiry support is not provided would potentially incur a significant number of billable hours in dealing with even a relatively straightforward enquiry. With a contingent fee structures the incentive is with the adviser to agree a mutually agreeable result as swiftly as possible, and we’re proud of our 100% success rate in this respect.

If you need support with an HMRC aspect enquiry, or you’d like to ensure your next R&D claim is swiftly processed by HMRC with minimal risk of one then contact ForrestBrown for a no-obligation consultation.